VC fund Flashcards
What are Venture Capital Funds
These are funds established by Venture capital Firms
Investors in Venture Capital Funds include Pension Funds; Public Corporations and Individuals and family trusts
their key skills Selection of projects Ability to pick winners Contracting Structuring the distribution of risk rights and returns to minimize moral hazard and selection problems
Monitoring Enforcing contracts Participation Nurturing/adding value Exit
How VC fund is established
A Fund is created by the venture capital firm
The fund has a dedicated Investment target
E.g. Biotechnology
The limited partners (investors) make capital commitments
The general partners charge a management fee (typically 2.5 % of funds raised)
The fund is liquidated and the proceeds distributed to the limited partners with a chunk (20%) of the gains going to the general partners
The general or managing partner (the venture capitalist VC) seeks out opportunities and invests these funds
Ultimately the VC exits from the investment distributes cash or shares and terminates the fund
The typical life is 7-10 years
The Venture capital Investment process
Stage 1 Identifying possible targets
Stage 2 – Investment Evaluation
If the proposal passes the broad screening a more detailed screening takes place
‘Quick Scan’ more detailed research into overall industry and viability
‘Risk Matrix’ rates risk in a number of areas –market, industry, technology, liquidity leadership etc
Passed to Investment Committee
Stage 3 Internal Due Diligence
After First Investment Committee Review
Detailed Discussions with company
Management
Technology
Intellectual property
Market
Shareholder structure
Financial Analysis
Use of financial reporting pack
Use of IRR
Valuation based on ‘What others will pay’
Focus on ‘burn rate’
Construction of Term Sheet
Passed to Second Investment Committee
Stage 4 External Due Diligence
Validation of assumptions regarding market technology and financials
Investment committee identify key factors for external due diligence
Use of technical consultants legal experts psychologists etc
Draft subscription agreement
Stage 5 Investment management
Now a portfolio company
Aggressive Effort
Executive Board Function
May assume interim positions for short term periods
Involvement in fund raising and crisis management or
Active Management
Membership of board monitoring performance
Review of companies activities in the following areas
Customer/employer/shareholder relationships
Financial legal
Technology
competition
A budget agreed at outset
Financial Reporting pack
Includes a variety of performance metrics
Quick Scan and Risk Matrix as living documents
Stage 6 Exit Management
Preparation for exit throughout process
Without exit prospect will not fund!!
VC determines business value
Attention on building value for exit
Prepares company for Sale
May employ exit specialists ( a corporate finance team)
What do covenants in VC financing achieve
Alignment of interests both benefit from success
Reduction of moral hazard entrepreneur loses more from failure
Monitoring (participation)
Signalling terms are not onerous for entrepreneurs who are confident of success
The possible benefits of Venture Capital Participation
Support Services Bring product to market more quickly Help facilitate strategic partnerships Selection of management team Detailed knowledge of industry
