Introduction to Venture Capital Flashcards
What is a VC?
A company that finances risky business
What is VC?
VC is capital invested in a project with a substantial amount of risk, typically a new / expanding business - a venture
When do VCs date back to ?
WWII - post war realisation that backing new businesses could stimulate the economy
It is a relatively new business - has financed the digital revolution
What is the point in a VC?
That investors buy shares in a company to share both the risk and reward to growing valuable businesses
Why is a VC needed?
To fund the Valley of Death
Who are Venture Backers?
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
How VCs work
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
How long to investors lock money up in VC funds for?
10+ years
Limited Partnership Agreement
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
Portfolio theory/strategt
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.
What is “carry” in a VC?
partners of a VC get 20% of profit if a fund is profitable enough to reach set target.
What degree are investors involved in deciding which companies to back?
It depends on the VC partnership agreement
In what cases can company stocks be sold for profit?
When the company exits (is sold)
Shares sold on stock market
How do VCs buy into a company?
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.
What kind of return should VCs make?
Higher returns than the stock market, to compensate for risk
Target return: usually 3x original investment
Longwall ventures
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
Internal Rate of Returns
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)
How long are investments by Longwall
Usually last 10 years (classic vc fund)
Longwall added extra 5 years because many university based spinouts take longer to make a profit
Tactic of VC funds when investing
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
How much equity in a company should VCs hold? Why?
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.
VC fund model types
Classic closed end fund
Listed balance sheet fund
Classic closed end funds
Portfolio of pooled assets that raise money through IPO and then trades shares on stock exchange
- price fluctuates due to supply and demand changes
Listed balance sheet fund
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)
EIS fund
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
VC trusts
Vehicles located on stock market
Regional public funds
Government gives money to stimulate innovation in specific regions e.g Wales
How may VCs differ in investment strategies?
- 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)
Which factors should an entepreneur consider when choosing VC?
- Investment strategy of VC
- Operational style (n of deals/year, size of portfolio, level of involvement, team structure etc)
Angels
Private individuals that invest their own money
May have other motivation other than financial gain
Family offices
Rich families that employ professional investors to manage their investments for them
How can you find angels or family offices?
Impossible, if not through networking
Corporate funds
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
How do milestones affect company valuation?
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
Alternate sources of fundings
Grants
Partnerships/collaborations
Revenues (can you sell an early product version e.g research tool?)
CAP Table
table providing analysis of companies percentages of ownership, equity dilution, value of equity in each round of investment by founders, investors and owners
Liquidation preferences
Dictates payout order in case of liquidation
Diluted founder
Process of startup founders gradually losing ownership of the company they have created
Anti dilution provisions
Measures that shield investors from equity dilution
Control
VC funds pay to have equity stake and control
What do VCs look for
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
What should a company look for in a VC?
Consider VC reputation and portfolio performance for brand benefit
If good VC invests in you, this adds credibility
What is private equity
Shares that are sold privately (before the company is big enough to go on the market)
What is the way into the market?
Innovators Early adopters CHIASM early majority late majority
