Handbook of Alternative Assets Ch 16 - Venture Capital

Question 1

Briefly Describe the Four Strategies for Private Market Investing

Answer 1

1. Venture capital - the financing of startup companies
2. Leveraged buyouts (LBOs) - public companies repurchase all of their outstanding
   shares and turn themselves into private companies
3. Mezzanine financing - a hybrid of private debt and equity financing
4. Distressed debt investing - private equity investments in established (as opposed
   to startup) but troubled companies

Question 2

State the Two Main Forms of VC Fees

Answer 2

1. Management fees - range from 1 to 3.5% of committed capital
   Ÿ Compensate the venture capitalist while they look for attractive investment
   opportunities
   Ÿ Fee is calculated as a percentage of committed capital (not invested capital)
2. Percentage of profits earned by the VC fund
   Ÿ Payout on Incentive Fee max pi Profit Generated by VC Fund, 0q
   Ÿ i is the percent of profit sharing by the venture capitalist (e.g. 20%)

Question 3

State the Eight Main Parts of the VC Business Plan

Answer 3

1. The market
2. The product/service
3. Intellectual property rights
4. The management team
5. Operations and prior operating history
6. Financial projections
7. Amount of financing
8. Exit opportunities

Question 4

State the Venture Capital Investment Vehicles

Answer 4

Limited Partnerships

Limited Liability Companies (LLC)

Corporate Venture Capital Funds

Venture Capital Fund of Funds (FoF)

Question 5

State the Five Stages of the Life Cycle of a Venture Capital Fund

Answer 5

1. Capital commitment / fundraising
2. Sourcing investments
3. Investment of committed capital
4. Monitoring and managing of portfolio companies
5. Windup and liquidation

Question 6

State the Five Stages of Venture Capital Financing

Answer 6

1. Angel investing
2. Seed capital
3. Early stage venture capital
4. Late stage/expansion venture capital
5. Mezzanine stage