venture capital

Question 1

What are VC’s and what do they do?

Answer 1

VC is a form of private equity financing that is suited to privately-held innovation-based early-stage technology firms with high potential for growth, but also with high investment risk.

Question 2

risk of VC

Answer 2

This risk deters conventional sources of financing, such as banks, from issuing loans to these firms.
Instead of providing loans, VC investors place investments in firms in exchange for a share of ownership and influence over business decisions.

Question 3

What are venture capitalist invest?

Answer 3

Venture capitalists only invest in the few firms that they believe offer the potential for very large financial returns.

Question 4

what do VC provide to company they invested?

Answer 4

In addition to capital, VC investors bring specialized skills to the enterprises in which they invest

Question 5

how long of a VC fund?

Answer 5

VC funds typical have a 7 to 10 year life span.
Usually all capital destined for VC investment is invested after years 3 to 4.
Up to 50% of the capital is reserved for follow up investments

Question 6

Unique VC characteristics

Answer 6

• invest in early stage companies that are developing new and innovative technologies.
• high risk and return
• generally do not use leverage in their transaction.

Question 7

unique PE characteristics

Answer 7

• buy into established business with growth potential.
• have greatest impact with company that need: expansion capital, management attention,strategic and direction, succession plannings…
• typically finance their acquisitions through a combination of equity and debt.

Question 8

value added area of VC (VC contributions)

Answer 8

Finance: VC firms help young, innovative company overcome credit constraints and raise more capital in the future capital raising rounds.

Strategy: VC firms provide analyses that can benefit business and sales strategy, engagement with consultancies and business plans.

Governance治理: improve in governance, such as contracting, reporting and milestones.

Operations: VC provide expertise in operational recommendation that lead to process optimization, cost management, and support in marketing and legal issues.

Access ti networks:VC though their networks to provide startups with new investors, potential customers, sales partners, M&A advisors and portfolio firms.

Human capital: VC firm can aid in a firm’s recruiting, coaching, consulting, salaries and remuneration报酬, talent retention, and promotions.

Question 9

Why is VC funding important?

Answer 9

VCs are particularly successful at solving an important problem in market economies - connecting entrepreneurs with good ideas (but no money) with investors who have money (but no ideas).

Question 10

type of VC investors

Answer 10

A domain expert is someone who’s deep into a certain field and knows everything going on in this industry.
An operator, or a growth expert, is someone who has a track record of growing and scaling a company.
A networker is someone who can make important intros to domain experts, operators, or your next investor.

Question 11

VC process

Answer 11

Deal sourcing,
Investment selection, 
Valuation,
Deal structure,
Post-investment value-add and 
Exits.

Question 12

How do VC deal sourcing?

Answer 12

VCs use a multi-stage selection process to sort through investment opportunities (deal funnel):
-Consideration by the individual originator at the VC firm,
-Meeting with the management of the potential portfolio company,
-Potential investments will then be scrutinized and evaluated by the other partners at the VC firm,
-Due diligence process commences,
-Term sheet presented and negotiated,
-Legal documents are drafted,
-A letter of commitment is signed and
The deal closes.

Question 13

How do VC firm selecting investment?

Answer 13

VCs focus on:
-The quality of the management team,
-The market or industry,
-The competition,
-The business model in their investment decisions.
-The product or technology,
-The valuation,
-Ability to add value and
-Fund fit.
VCs have different views on how to select investments. Some focus more heavily on the management team (the jockey) while other focus more heavily on the business: the product, technology, and business model (the horse).
The team is more likely to be the most important factor for early-stage investors and IT investors than for late-stage and healthcare investors. Business related factors are more likely to be most important for late-stage and healthcare investors.

Question 14

Important Qualities in a Management Team:

Answer 14

The management team is consistently the most important factor VCs consider when they choose portfolio companies. Important Qualities in a Management Team: 
Industry experience 
Entrepreneurial experience 
Ability 
Teamwork
Passion

Question 15

how do VC value the company? investment decision making?

Answer 15

Traditional investment decision making relies on discounted cash flow (DCF) or net present value (NPV) analysis with a cost of capital based on the systematic risk of the opportunity.
-Private equity investors rely primarily on internal rates of return (IRR) and multiples to evaluate investments.

Question 16

The most popular valuation method of VC:

Answer 16

The most popular valuation methods are:

• Cash-on-cash multiples,
• IRR and
• NPV methods.

Late-stage and larger VCs require lower IRRs of 28% to 29% while smaller and early-stage VCs have higher IRR requirements.

The same pattern holds in cash-on-cash multiples, with an average multiple of 5.5 and a median of 5 required on average, with higher multiples for early-stage and small funds
Smaller company have higher risk, so require higher return.

Question 17

Important Factors for Portfolio Company Valuation::

Answer 17

Anticipated exit
Comparable companies
Competitive pressure
Desired ownership

Question 18

Deal structure of VC

Answer 18

VC’s tend to first protect their downside risks and then position to enjoy the upside.

Question 19

Contractual Terms of VC deal structure

Answer 19

Pro-rata rights 
Liquidation preferences 
Anti-dillution 
Valuation 
Board control 
Vesting 
Ownership stake 
Participation 
Investment amount 
Option pool 
Redemption rights 
Dividends

Question 20

Syndication of VC

Answer 20

VC firms routinely invest with other firms as part of a syndicate. Hochberg et al. (2007) suggest a number of reasons for the prevalence of syndication, such as reputation, capital constraints of investors, and risk sharing.

Syndication is common with the average VC firm syndicating an average 65% of its investments.

Question 21

Post Investment Value Adds of VC

Answer 21

Types of value adds:

• 87% of VCs are involved in strategic guidance of their portfolio companies,
• 72% of VC firms help their companies connect with investors in future rounds,
• 69% of the VCs say they help their companies connect to customers,
• 65% of VC firms say they provide operational guidance and
• Finally, the VCs say they also help in hiring both board members (58%) and employees (46%).

Question 22

Exits of VC

Answer 22

Because VCs invest in private companies through funds that are usually structured as ten-year vehicles and because VCs receive their profit share or carry only when they return capital to their investors, the timing and type of exit is critical to VC investment success.

Question 23

VC’s reveal the crucial elements to a successful investment from most to least:

Answer 23

• Team
• Business model
• Technology
• Market
• Industry
• Timing
• Luck
• Board of directors
• VC contribution