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Deploying a $100 Mn early stage fund

Startup Central Master-class July 21st ,2012

Please point out if you don’t understand the Jargon

Round 0- provide for the ‘expenses’

Pre-operative expenses, other expenses and fees for 10 years @2/2.5% pa amount to around 20% of the fundSo out of $100 mn, set aside atleast $20 mn

So while returns are counted on $ 100mn, the deployment is of $ 80 mn only

Casting the Net- Round 1 (Seed, Series A)

Nos 1st RoundAvg

Stake

6Startups,negligible revenues, incubator

$ 0.5M, 15%

6Startup with revenues

$ 2 mn, 15-30%

6Early stage, mature startup, mature teams

$3 mn 15-30%

18 round 1 investments ( range 15-20) $32 mn

Trying to Pick Winners (Series B)

Nos Follow on$

Valuation Avg Stake

5 Potential Home Runs

3-5mn $ 20-30mn 20-30%

4 potential winners

2-3mn $ 10-20mn 20-30%

Total in 9 cos $ 30 mn

Following on- Break-outs(Series C)

Nos Follow on$

Valuation Avg Stake

4-5 Sureshot Exits 3-4 mn $50mn 20%

Total Follow on in 4-5 cos

$20 mn

So these 4-5 companies will be close to $10 mn or 10% each of the fund

Deploying More money

• Very few companies go towards a $250mn plus exit.

• So its usual for earlier funds to not invest in beyond a point.

• However, a $200 mn fund will continue to invest in Series C, Series D, Pre-ipo- all rounds

Total DeploymentNos Deployment % Remarks

Round 0 18 mn 18% Try to recycle some money from early exits

Round 1 32 mn 32% More companies? More stake per co?

Round 2 30 mn 30% Be bold here- don’t wait for next round

Round 3 20 mn 20% Pay to Play? Does it exist?

Exit Scenarios- optimisticKind of Exit Average

DeployedStake held at Exit

Valuation How many

Total Returns, $ Sum (a*b)

Home Run 10mn 10-15% $500 mn 1 60 mn

Winners 5 mn 15% $ 125 mn 3 60 mn

Money-Backs1-2X

6 mn(???)

20% $ 25-50 mn

5 50 mn

Duds0-1X

20% - 11 30 mn

Total 200Mn

Investor return post carry is $180 mn, or 1.8 times, over 7 years

Strategies

• Cast the net wide- take early stake in more companies, have a better shot a winner

• For smaller funds, try to aim for early exits, smaller $25-50 mn in niche spaces

• For larger funds, try to play PE. invest in traditional capital intensive industries with high revenues- healthcare, education. No blockbusters here, but money moves and exits are real