Venture_Capital

Document Sample

Shared by: rambling2
Categories
Tags
Stats
views:
675
posted:
10/10/2007
language:
English
pages:
35
Understanding Venture Capital



Where Does VC Fit in the Financial Cosmos?

Users of Capital

Sources of Capital



Money Managers

•Stock Funds



• Pension Funds

• Wealthy Families • University Endowments • Foundations • Others



Public markets



•Bond Funds

•Hedge Funds •Private Equity



Fund of Funds



•VC •LBO



•Entrepreneurs trying to start a business



•Other



•Entrepreneurs trying to buy a business



Within VC Asset Class

Seed / Incubation Or by …



Early Stage



Multi-Stage



• Industry

• Technology



Late Stage / Mezzanine



What Is The Point?

• • • • Raise money Invest it Give back lots more than we took in Repeat



Why Do It?

• Oh, yeah, we keep some for ourselves • Management fees – 2-2.5% per year • Profits interest: 20-30%



Really, Why Do It?

• • • • • Spend all your time on the cutting edge Meet very interesting people Change the world New challenge every day Can be very lucrative



Exactly What Do We Do?

• • • • Raise money Make investments Monitor investments Exit investments



Examples

• COMPAQ • CIENA • Citrix Systems



What Does VC Mean to an Institutional Investor?

• Illiquid • Takedown over time • Very long gestation • Series of pools, or “funds”

• Part of small allocation (5-10%) to “alternative assets”



Institutional Investor Perspective

• VC firm is just a money manager with multiple funds • Difference:

– Stock fund money manager – different funds by strategy – VC fund money manager – different funds by vintage



Example: Sevin Rosen Funds

• Early stage technology - constant • Multiple funds

– Fund I (1981) - $25 million



– Funds II (1983) through VII (1999) – Fund VIII (2000) - $600 million



What is a Fund?

• Legally: a limited partnership • Characteristics:

– Committed capital – Term – Takedown schedule – Investment restrictions – Lots more



Objective

• Make n investments over 1st y years of the fund • Exit those investments in the 10-12 year term at a profit



What is y?

• Usually target 2-1/2 to 4 years • Less – too much time raising funds • More – LPs want chance to re-up more often than that • Sometimes miss the target



What is n?

• Balance: diversification vs. focus and impact • Inverse of targeted $ per deal (d) • d is over the life of the deal

– Typically 1st investment is 30-40% of expected d



How to Set Fund Size

• Function of:

– $ per deal (d) – physics of companies – # of GP equivalents – Companies / GP

• Steady state board capacity • Turnover rate



Objective Revisited – Make Money for LPs and GP

• Measure success over 10-12 years • Metrics: IRR or cash-on-cash over the life of the fund

• Looking to juice “returns” over public equity (15-20+% vs. 12-15%)



• Spoiled in the boom with 100%+ IRRs



Objective Revisited – Make Money for LPs and GP

• Given 10 year life, we need to make a multiple of the fund:

10 year IRR

2x 3x 4x 7.2% 11.6% 14.9%



7 year IRR

10.4% 17.0% 21.9%



5x 8x 10x



17.5% 23.1% 25.9%



25.8% 34.6% 38.9%



And That’s Not All

• Layer on top of that:

– Historical batting average - .500, plus or minus



• So 5x the fund means 10x on the deals that work • On average



So, What Really Happens?

Fund I

FUND I

36.2x 42.6x 60.0 60.0



Fund II

FUND II

Fund II = $60.6MM



50.0



50.0



20.9x 40.0 Capital Invested (in $mm) Capital Returned (in $mm) 40.0 1 4.7x 30.0 1 9.4x 9.1 x 9.6x 1 .0x 1 20.0 20.0 4.1 x Capital Invested (in $mm) Capital Returned (in $mm)



30.0



Fund I = $19.6MM

1 0.4x 1 0.0 6.3x 7.9x 9.0x 3.2x



Total returned $223.0MM 3.7x CC

1 0.0 3.0x 5.6x 2.1 x 3.1 x 3.8x 4.0x



Total returned $180.6MM 9.2x CC



3.9x



0.8x



1 .8x



1 .2x 0.8x 0.3x ---------



0.0



0.0



Total invested $18.3MM 93.4% of CC

-1 0.0 -1 0.0



Total invested $53.68MM 88.6% of CC



Fund III

FUND III

1 50.00 1 40.00 39.3x 1 30.00 1 20.00 1 0.00 1



Fund IV

590.00 80.00 138.5x



FUND IV



13.1x 70.00 Fund IV = $65MM 60.00



11.3x

1 00.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 1 0.00 (1 0.00) 50.8x Capital Invested (in $mm) Capital Returned (in $mm)



50.00



40.00 19.6x Capital Invested (in $mm) Capital Returned (in $mm)



Fund III = $65MM



30.00 8.4x



Total returned $266.3MM 4.1x CC



20.00 3.2x 3.4x 3.2x 1.3x 0.2x Total returned $826MM 12.5x CC



10.00

4.2x



3.5x



2.1 x



3.5x



0.4x

1 .9x 0.6x 1 .9x 1 .0x 0.1 x 2.5x -----------



1.0x Total invested $66.3MM 102% of CC



-



Total invested $69.4MM 106.8% of CC



(10.00)



So, What Really Happens?

• Fund I – 9.2x overall

– 2 @ 20-40x; 3 @ 10x; .529 avg.



• Fund II – 3.7x overall

– 2 @ 20-40x; 2 @ 10-15x; .560 avg.



• Fund III – 4.1x overall

– 2 @ 40-50x; .409 avg.



• Fund IV – 12.5x overall

– 1 @ 140x; 3 @ 10-20x; .526 avg.



Practical Impact

• Capital invested matters • Valuation matters • VCs are sluggers, not looking for infield singles and walks • Focus on potential winners • Cents on dollar in bad deals not worth much



How Do We Manage Such a Process?

• Deal making – very hard because:

– Usually invest before market is clear – Feedback loop very long (and expensive) – Success (and failure) has large luck component



• Success in other venues no guarantee • Like sailing blindfolded



Who Are Deal Makers?

• Each firm has deal makers of varying experience

– General partner, managing director, etc. – Partner, principal, etc. – Associate, more or less senior – Analysts



Key Role - General Partner

• Make investment decisions

– Initial investment is most important



• Help each company be as successful as it can be • Sometimes less is more • Help others apprentice



Herding Cats

• Very different models

– Cowboy confederation model – Consensus models – Joe Blow Ventures – either you’re Joe or you’re not



• Lots of blends of these • Explains a lot of behavior



How We Make Decisions

• Slowly (these days)

– Due diligence hell



• Some never tell you no • The role of partners meetings • Type of investment matters

– New investments – Follow-on investments



How we get paid

• Depends on the model • Management fee

– % of committed capital – Imagine 10 year revenue visibility



• Profits interest (carry)

– Helps if there are profits



What Breaks Down?

• Management fee

– Role of multiple funds



• Carry

– Fund by fund – Sharing philosophy



Wait – What Happens When Fund is Fully Invested

• You raise another fund • You don’t



Multi-fund Firms

• Series of partnerships every 2-4 years • Generally don’t overlap portfolios

• Crossover investing is big issue



• Know what fund you are in, and the rules

• Amplifies the management fee issue



What Can Go Wrong – New Investments?

• Unseen scar tissue



• Bad chemistry

• Bad hair day



• Misjudge the DMU • Ego crowding



What Can Go Wrong – Existing Portfolio Companies?

• The living dead syndrome



• Chronic fatigue syndrome, VC style • No money left problem • Partner on the roof problem • With some firms, “it’s in their nature” • GP overload – drive-by board meetings



What Can Go Right?

• Well established firm



• Capital access – direct and referrals

• GP – operating and domain experience



• Other resources • Know your partner




Share This Document


Related docs
Other docs by rambling2
How fuel cells work and fact sheet
Views: 338  |  Downloads: 26
Why to invest in Private equity
Views: 2627  |  Downloads: 190
Venture_Capital
Views: 675  |  Downloads: 61
Maddox-Report Card (http://maddox.xmission.com/)
Views: 1485  |  Downloads: 19
Citibank Market Review 10-15
Views: 813  |  Downloads: 2
GTOP IPO
Views: 204  |  Downloads: 6
TIPS_Trading_Volume
Views: 206  |  Downloads: 0
PPP- based Comparative Price Levels _CPL_
Views: 846  |  Downloads: 2
SEC Final 2004
Views: 221  |  Downloads: 1
by registering with docstoc.com you agree to our
privacy policy

You are almost ready to download!

You are almost ready to download!