Docstoc

Venture_Capital

Document Sample
Venture_Capital Powered By Docstoc
					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


				
DOCUMENT INFO
Shared By:
Tags:
Stats:
views:709
posted:10/11/2007
language:English
pages:35
rambling2 rambling2
About