What is VC / PE / E ?
- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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The Cycle
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Common Denominators: • Sophisticated Financial Investors • Highly Motivated Owner-Managers • Opportunity to Earn Exceptional Investment Returns
- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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Entrepreneur – VC / PE
• Controls successful idea
– Generally has ability to execute on the opportunity, but many times lacks the capital to finance it
• Often times an entrepreneur must give ownership and/or control in company for capital • Sees VC / PE as the most expensive form of financing
– VC / PE will provide financing when banks won’t, but these firms must be compensated for risk
- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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VC / PE Managers Responsibility
• Raise money from limited partners • Identify opportunities
– Identify either companies or management talent – Search through thousands of opportunities to find value • Not unusual to invest in 1 of every 200 credible deals
• Invest cash in exchange for equity
– Investment usually combination of Debt and Equity – Requires technical structuring
- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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VC / PE Managers Responsibility
• Sit on company board of directors contributing:
– Business experience – Industry expertise – Financial expertise
• Looks to exit with a high return
– Target return 25% to 50%, depending on risk • Earlier stage generally requires higher returns than later stage – Has a 5-7 year investment horizon
- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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Structure of VC / PE fund
Pension Funds Foundations College/University Endowments
Wealthy Individuals
Financial Institutions (Banks/Fund of Funds)
Insurance Companies
$$ Private Equity / Venture Capital Fund
$$
Portfolio Company A
Portfolio Company B
Portfolio Company C
Portfolio Company D
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- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
Structure of VC / PE fund
• Responsible for:
– Sourcing and executing transactions – Provide oversight of company, board level • Generally does not run the businesses – Exiting transactions
• Has sole discretion on investments • General life of fund: 5-10 years, with cap
– Firm will have multiple funds over time
• Receive a fee for managing money
– 2% to 3.5% of money managed yearly for expenses – 20% to 35% of profits realized
- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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VC/PE – Investor Types
• Angels (VC) - Initial stages of growth
– Wealthy individuals with operating experience who typically invest between $50,000 and $1.5 million
• Venture Capital Firms (VC) - Seed to later stage
– Limited partnerships or corporations that typically invest between $250,000 and $20 million
• High-net-worth Private Placements (VC or PE)
– Group of “high-net” individuals makes a direct investment into a private company, typically invest between $5 million and $50 million – Company does not receive Angel/VC/PE management assistance
- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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VC/PE – Investor Types
• Private Equity Firms (P/E)
– Limited partnership or corporation that buys control of private or public firms using their own capital combined with debt (leverage) – New management may put in place and/or the company may be taken in a different direction – Size of these transactions can range from $1 million to several billion
• Hedge Funds / Traders
– Limited partnership or corporation that buys and sells public instruments (stocks, bonds, commodities, currencies, etc.) – Size of these funds ranges from a few million to several billion – May take ownership position with hopes of selling to a PE fund
- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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Growth in Venture Industry
Year 1970 1980 1990 2002 # Venture Firms Capital Under Mgt 28 $1B 87 386 892 $3B $32B $253B
Source: 2003 NVCA Yearbook, prepared by Venture Economics, page 18
- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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Difference Between VC and PE
• VC’s invest in the very early stage of a companies life cycle • PE’s invest in established companies
Private Equity
Venture Capital
- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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VC – General Investment Types
• Seed
– Company is just a few people and/or an idea – Investment $1k to $500k made
• Start-Up (or “A” Stage)
– Company is completing product development and beginning initial marketing – Investment $50k to $1 million
• First Stage (or Early Stage or “B” Stage )
– Company has completed its product but has no or little revenue – Investment $500k to $15 million
- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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VC – General Investment Types
• Second Stage (or Later Stage or “C” Stage)
– Company has product and revenues, plus has often already taken other institutional money – Investment $2 million to $15 million
• Third Stage (or Mezzanine or “D” Stage )
– Profitable company for a major expansion generally leading to an IPO in 3 to 18 months – Investment of between $2 million and $20 million
- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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VC – General Investment Types
• Bridge
– Company is typically profitable – Investment of between $2 million and $20 million • Made only 3 - 12 months before the company "goes public" – Reasons a company would finance so close to the time it goes public: • To improve its balance sheet • To get a prestigious investor on its board which will help it increase its value in the public markets • To hedge its position in case it can't go public so soon
- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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VC – Range of Investment Types
Seed Size Source Runway # Empl. Milestone
~$500k $1m
“A”
“B”
$15m
“C/D”
~$20m
Bridge
~$20m
Angel 6-12 months <10 Clear plan & Team
VC 12-18 months
VC 18-24 months ~50 Sales, mkt size
Mezz 2+yrs
IB 2+ yrs
~30 Beta product & customers
~100 Strategic
>100 Growth, profit
- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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PE – General Investment Types
• Leveraged Buyout
– Acquire control of a company, utilizing a combination of debt and equity…. Similar to buying a house – Returns are made through debt leverage and company value growth
• Growth Equity
– Infuse cash into a company that needs capital to expand, but cannot obtain additional bank debt
• Focused Growth (Roll-Up)
– Acquire numerous businesses in one market and consolidate them into one large company – Returns are made through cost reductions, cross-selling and other synergies
- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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PE – General Investment Types
• Distressed
– Acquire a company that is underperforming and turn it around • Liquidation may also be an option – One may acquire either debt or equity to gain control
• Mezzanine
– Lends high-coupon debt, which generally has options attached – Offers higher returns than bank debt, with downside protection like debt, but has lower returns than equity investors
- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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PE – General Investment Types
• Secondary Purchases
– Acquire ownership of a company from a private equity fund – This helps make the PE market more liquid
• PIPE (Private Investment in Public Equity)
– A PE firm may invest in a public company without buying secondary shares – Generally preferred stock with a coupon and warrants attached
- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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Other – Investment Types
• Corporate Investors
– Acquire company with the hopes of someday adding it to their portfolio of operating companies • Generally companies find this type of environment better for developing small businesses – Companies may also purchase targets directly and integrate them into their company
• SBIC
– Firm may augment its own fund with funds from the federal government – There are strict rules surrounding the uses of these funds, the government is the first equity investor to get repaid, but the government requires a lower rate of return
- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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Why VC / PE as a Career?
• Exciting and interesting
– Opportunity to work with multiple companies, industries and professionals – Act as an owner, not an agent
• Utilize a broad range of skillsets
– Finance, marketing, operations, negotiations, strategy, etc.
• High risk / High reward • And Many More...
– This discussion is not focused on careers in the space – Careers for MBAs in the PE/VC/E space will be the focus of future events held for EVC Group members only
- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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- Written by: Jason R. Blumberg, 2005 © University of Chicago Graduate School of Business - All information is the property of the U of C GSB EVC Group.
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