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MDE > Introduction to Venture Capital > Flashcards

Introduction to Venture Capital Flashcards

1
Q

What is a VC?

A

A company that finances risky business

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2
Q

What is VC?

A

VC is capital invested in a project with a substantial amount of risk, typically a new / expanding business - a venture

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3
Q

When do VCs date back to ?

A

WWII - post war realisation that backing new businesses could stimulate the economy
It is a relatively new business - has financed the digital revolution

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4
Q

What is the point in a VC?

A

That investors buy shares in a company to share both the risk and reward to growing valuable businesses

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5
Q

Why is a VC needed?

A

To fund the Valley of Death

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6
Q

Who are Venture Backers?

A

FROM OWN MONEY:

  • Private individuals
  • Family offices

FROM OTHER PEOPLES MONEY:

  • VC funds
  • Corporate investors

SYNDYCATORS (bring groups of investors together)

  • Angel clubs
  • Wealth managers
  • Crowdfunding platforms
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7
Q

How VCs work

A

Fund managers look at potential investments, make deals, invest money drawing it down from each investor on a case by case basis.
Fund managers sit on the board of these startups and help grow business

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8
Q

How long to investors lock money up in VC funds for?

A

10+ years

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9
Q

Limited Partnership Agreement

A

Fund managers pitch to investors what investment they want to go into, and investors can chose if they want to back the agreement. After that, investors delegate decision making to the fund manager

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10
Q

Portfolio theory/strategt

A

Investing smaller amounts in different high risk companies maximises profit
Risks of a startup not succeeding are high
Odds are some will not work out
Investment in lots of startups will minimise this risk.
With each stage of investment (from. Seed to Series E) uncertainty and risk decrease.

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11
Q

What is “carry” in a VC?

A

partners of a VC get 20% of profit if a fund is profitable enough to reach set target.

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12
Q

What degree are investors involved in deciding which companies to back?

A

It depends on the VC partnership agreement

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13
Q

In what cases can company stocks be sold for profit?

A

When the company exits (is sold)

Shares sold on stock market

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14
Q

How do VCs buy into a company?

A

They buy private equity before anyone wants to buy stocks on the public market. They take a high risk buying shares when company worth is low, with hope of later selling them for higher prices.

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15
Q

What kind of return should VCs make?

A

Higher returns than the stock market, to compensate for risk
Target return: usually 3x original investment

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16
Q

Longwall ventures

A

Invest in early stage science, engineering , HC.
They have funds that generally overlap with time and cyclical in nature.
This is the classical VC model

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17
Q

Internal Rate of Returns

A

Used to evaluate the attractiveness of an investment (IRR of a new project must exceed the company’s required rate of return, otherwise it will be rejected)

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18
Q

How long are investments by Longwall

A

Usually last 10 years (classic vc fund)

Longwall added extra 5 years because many university based spinouts take longer to make a profit

19
Q

Tactic of VC funds when investing

A

Invest early in the life of a company, and expect to be a key backer all the way to exit.
They believe that best returns are made by following a company all the way through

20
Q

How much equity in a company should VCs hold? Why?

A

Be bold - have 20-30% equity in companies (being bold earlier means you’ll get a bigger cut of rewards later on) and company may be further diluted, so large cut now may mean smaller cut later on.

21
Q

VC fund model types

A

Classic closed end fund

Listed balance sheet fund

22
Q

Classic closed end funds

A

Portfolio of pooled assets that raise money through IPO and then trades shares on stock exchange
- price fluctuates due to supply and demand changes

23
Q

Listed balance sheet fund

A

Company has money on its balance sheet it can invest in portfolio and focuses on building value of returns companies
(if you do badly, this is made public)

24
Q

EIS fund

A

Enterprise Investment Scheme - private investors get Tax breaks in the UK when they invest in startups, as the government wants to stimulate investment in high risk companies

25
Q

VC trusts

A

Vehicles located on stock market

26
Q

Regional public funds

A

Government gives money to stimulate innovation in specific regions e.g Wales

27
Q

How may VCs differ in investment strategies?

A
  • Size of fund (amount per investment)
  • Geographic coverage (which regions do they invest in?)
  • Preference for stage (some prefer “seed”, others later)
  • Follow or not (do they sit on boards or not)
28
Q

Which factors should an entepreneur consider when choosing VC?

A
  • Investment strategy of VC

- Operational style (n of deals/year, size of portfolio, level of involvement, team structure etc)

29
Q

Angels

A

Private individuals that invest their own money

May have other motivation other than financial gain

30
Q

Family offices

A

Rich families that employ professional investors to manage their investments for them

31
Q

How can you find angels or family offices?

A

Impossible, if not through networking

32
Q

Corporate funds

A

Divisions of large companies set up to invest in startups

  • Most pharm companies have them
  • They do it to have other options. that just pharm
  • Often have a strategic rationale for investing, not just financial
33
Q

How do milestones affect company valuation?

A

Milestones show clinical trials, where regulatory approval can be gained to reduce risk
Valuation should increase with each milestone reached, as investors will pay higher price with smaller risk

34
Q

Alternate sources of fundings

A

Grants
Partnerships/collaborations
Revenues (can you sell an early product version e.g research tool?)

35
Q

CAP Table

A

table providing analysis of companies percentages of ownership, equity dilution, value of equity in each round of investment by founders, investors and owners

36
Q

Liquidation preferences

A

Dictates payout order in case of liquidation

37
Q

Diluted founder

A

Process of startup founders gradually losing ownership of the company they have created

38
Q

Anti dilution provisions

A

Measures that shield investors from equity dilution

39
Q

Control

A

VC funds pay to have equity stake and control

40
Q

What do VCs look for

A

A great team
Unique capability with a defensible mood (unique advantage - YOU SHOULD HAVE A BUSINESS RESISTANT TO CMPETITION. IT YOU DONT HAVE A BUSINESS WITH A PATENT/COMPETITIVE ADVANTAGE, other companies will replicate it and buy you out)
Large addressable market with product market fit
Clear route for adoption
Credible way to cross chasm into large market

41
Q

What should a company look for in a VC?

A

Consider VC reputation and portfolio performance for brand benefit
If good VC invests in you, this adds credibility

42
Q

What is private equity

A

Shares that are sold privately (before the company is big enough to go on the market)

43
Q

What is the way into the market?

A 
Innovators
Early adopters
CHIASM
early majority
late majority

MDE (16 decks)

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