2 03 overview of vc

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					BUSI 221L
Start-up issues for High-Technology Start-ups
February 3, 2003

“Starting companies is like having babies – fun to conceive but hell to deliver.”

                                                                                    -   Anonymous

Criteria for Attorney Selection

        Reputation
        Experience with start-ups/expertise (have they done it before)
        Introduction to angel network
        Access to venture capital firms
        Library of precedents (firm as library of documents used before)
        Potential employees/board members
        Contacts in industry

Angel Investors = High net worth individuals with high risk appetite
Fewer angels now in Triangle area than two years ago

        Early Stage Preference
        Profile – one and done (provide one check, not series of financing)
        $25,000 - $50,000
        Bell Cows (often angels follow others, if this guy writes a check, I will too)
        Qualified Business Venture (QBV) registration (In North Carolina, 25% tax credit for
         angels if you invest in a qualifying business)
        Endangered species

Pro/Con on Angel Investors

        Terms offered by Company rather than investors
        Less sophisticated on terms and value
        Sped (quicker decisions,; less due diligence)
        Simple investor relations with right angels
        Follow – on issues (lots of people on capitalization chart)
        Issues for VC’s (VCs may see each angel as a potential lawsuit, if board does not
         complete fiduciary responsibilities)
        Less “Value Added” (not as much industry experience)

Venture Capital is professional managed pools of capital. Usually organized partnerships,
established specifically to invest risk capital in private companies.
Source: Kauffman Center for Entrepreneur Leadership

How Venture Capital Firms Make Money
       After they return 1x on investment, they receive 20% of profits. Also, 20% of fund is
        allocated to general partners and special limited partners. 2% of fund is used as an
        administrative fee.

       Target is 25-30% annual Internal Rate of Return (IRR) or 500 basis points (5%) over the

VC Rules of the Game (what makes you venture backable)

There is nothing wrong with not being venture-backable. Lifestyle businesses are okay. There is
nothing wrong with $1M/year going into your pocket.

       Need 10x return possibility
       Short term liquidity possibility
       Management / Technology
       Less risk-adverse than advertised
       Herd mentality
       Hopefully value-added (expertise, contacts, follow-on funding)

Commitments to Venture Capital Funds

1998    31.3B
1999    61.4B
2000    97.2B
2001    35.8B
2002    13B

Notes Disclaimer: No warranty is made as to the accuracy of the information contained in these
notes. They are notes taken from a live class and as such inaccuracies are possible. This site,
nor any parties mentioned, will not accept any responsibilities or liability for actions taken based
upon these notes. Please consult professional legal advisors when making any business or legal

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