Venture Capital 101
May 6, 2008
What Kind of Financing
Alternatives Are Available?
• Cash flow ("bootstrap") – customers!
• Research grants
• Debt (bank financing)
• Equity funding
– Venture capital (corporate vs. institutional)
– Later stage private equity
What do professional
venture capitalists do?
• Raise money into limited partnerships from
pension funds, endowments, corporations, and
high net worth individuals
• Review thousands of deals, invest in a few
• Take an active role in helping entrepreneurs
build their companies
– Recruiting key employees
– Future financing assistance
– Strategy and partnerships
– Assistance with IPOs and M&A
• Company headquarters: Cameron Park, California
• Founder & CEO: Andy Beal
• DFJ Frontier Director: Scott Lenet #1 web site for high
• DFJ Frontier investment: December 2004 school sports
• Investment thesis: Sold to CBS
– MaxPreps is the "ESPN" of high school sports
– While most sports information sites and media properties provide commodity data,
MaxPreps is in a position to maintain a sustainable advantage as the source of high
school statistics, video, photography, and user created content
• How DFJ Frontier helped MaxPreps (our α):
– Restructured cap table and led Series A funding with which MaxPreps closed deals
with the Army, Nike, Adidas, ESPN, USA Today, etc.
– Helped company secure $6M Series B investment led by Dolphin Equity
– Provided product marketing expertise to launch viral registration program
– Sourced and interviewed key hires
– Sold to CBS in April 2007
What Kinds of Professional
Venture Capitalists Are There?
• Institutional vs. corporate/strategic
• Focused by industry sector:
– Information technology (software, hardware, etc.)
– Life sciences (biotech, medical devices, etc.)
– Alternative energy
– Social ventures
• Focused by investment stage:
– Seed and early stage
– Late stage
– Mezzanine, debt, and buyouts
• Focused by geography
Stages of Investing
Stage Definition Typical Round Size
Seed product not yet complete $250k-500k
Early pre-revenue $2-5 million
Late revenue / growth model demonstrated $5-25 million
Mezzanine ready to go public $10-50 million
Buyout purchasing control of the company sometimes billions
Debt lending capital, not equity investing runs the full range
Stage is measured by progress, not by company age
How Do Investors Differ?
Angels West Coast VCs East Coast VCs
invest early invest early invest later
answer to a spouse answer to LPs answer to LPs
ad hoc decisions defined fund/timeline defined fund/timeline
many potential motivations financial motivations financial motivations
informal deal flow formalized deal flow formalized deal flow
experts & generalists experts & generalists experts & generalists
get washed out easily sometimes washed out rarely washed out
many risk/reward combos high risk/high reward lower risk/lower reward
can get a "super deal" can get a "super deal" tough to get a "super deal"
What Kinds of Companies
Should Raise Venture Capital?
• High growth businesses
• High profit margin businesses
• Companies with intangible assets, for whom
other forms of financing might not be available
• Companies whose managers plan to seek
liquidity in the form of M&A or a public
offering at some point in the future
VCs rely on the ∆ between the value of the company today
and the potential value of the company in the future
Ten Questions You Should Ask
1. What do you do?
2. What problem do you solve?
3. Who is the team solving it, why are you uniquely capable?
4. Who are the customers, why will they buy?
5. How big is your addressable market, other markets?
6. How do you make money?
7. Who competes with you?
8. Why are you better, and how will you stay better?
9. How much money do you need, will you need more?
10. What will be achieved with that money, by when?
Don’t forget contact information!!!!
What Ingredients Create
Powerful business models