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Copyright © 2015 by the Board of Trustees of Stanford and Stanford Technology Ventures Program (STVP).
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Session 9A: Sources of Capital, VC Fund Economics
E 1 4 5 | F A L L 2 0 1 5
Tom Byers and Chi-Hua Chien
e145.stanford.edu
Idea Vs. Opportunity(module 1)
Realities ofBusiness
Operations(module 2)
© Mark P. Rice, Babson
P R O D U C T O R S E R V I C E M A R K E T
P E O P L E A N D O R G A N I Z A T I O N
R E S O U R C E S A N D C A P I T A L
P U R S U I T O F O P P O R T U N I T Y
O P P O R T U N I T Y R E C O G N I T I O N
2
F R A M E W O R K A : T W O P E R S P E C T I V E S
S A M P L E O U T L I N E O F T R A D I T I O N A L B U S I N E S S P L A N
• Executive Summary
• Market Analysis
• Vision and Concept (Including Technology)
• Competitive Positioning and Marketing
• Business Model• Organization• Financial Projections
• Ownership
3
} Amplify inE145 Module 2
A B C ’ S O F H O W V E N T U R E S G E T F I N A N C E D
4
A M O U N T O F C A S H
N E E D E D A N D P U R P O S E
A
S O U R C E S O F C A P I T A L
B
D E A L S T R U C T U R E
C
A ) A M O U N T : T W O K E Y Q U E S T I O N S
• Q1: How much money is needed for this “round” of financing?
• Q2: Which white hot risk will be reduced with this money?
Typical Financing Stages (or Rounds):
Seed Early Mezzanine Late (e.g., IPO)
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F R A M E W O R K F : “ T H E M O S T I M P O R T A N T R I S K R I G H T N O W ” ( Q U E S T I O N 2 )
MarketRisk
Product / Technology Risk
Financial / CapitalRisk
TeamRisk
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R E C A L L T H E Y A H O O C A S E
• Yahoo: What are the advantages and disadvantages of each of the three major options they could pursue to finance the venture in 1995 (e.g., venture capital, corporate partnerships and sponsorships, and acquisition to become an operating division of an established company)?
• ”I suggest that Jerry and David [accept/do not accept] Sequoia's offer because..."
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M O R E C O S T L YD I L U T I O N O F E Q U I T Y
M & AS E L L I N G 1 0 0 % T O
A N O T H E R F I R M
P A R T N E R S H I P SS P O N S O R S H I P S O R
S T R A T E G I C I N V E S T O R S
V CT A K E V E N T U R E C A P I T A L
I N V E S T M E N T
I N C R E A S I N G E N T A N G L E M E N T
L O S S O F C O N T R O L
F I N A N C I N G T R A D E O F F S
A N G E L S S E E D O R S E R I E S A
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New Business
Firm
I N V E S T M E N T B A N K S
I P O & P U B L I C P L A C E M E N T
V E N T U R E C A P I T A L
F I R M S S E R I E S A , B , C
F R I E N D S A N D F A M I L Y
S E E D F U N D S
Table 18.4
P E N S I O N F U N D S P R I V A T E I N V E S T O R S
C O R P O R A T I O N S
B ) S O U R C E S O F C A P I T A L
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Idea Business Plan
Prototype Beta
Sales Profitability
Decreasing Risk
$100K
$1M
$10M
Incr
easi
ng In
vest
men
t Si
ze
VC Banks Angels !
(Groups & Syndicates)
FFF Gov’t
IPO Strategic Partners
Reference: Trevor Loy (Flywheel)
Crowd
B ) S O U R C E S O F C A P I T A L
VENTURE CAPITALISTSFinding and Funding
Entrepreneurial Companies
ENTREPRENEURSStarting and Building
Companies
INSTITUTIONAL INVESTORSLimited Partners (LPs)– e.g.
Endowments, Pension Funds
High-Risk Equity Return Diversification
Management Fees Share of Profits
Management Help Financing Credibility
V E N T U R E C A P I T A L F I R M S : L I M I T E D P A R T N E R S H I P S W I T H A F I N I T E L I F E A N D S U B S T A N T I A L P R O F I T S H A R I N G
Capital + Time and Help Capital
Preferred Stock “Liquid” Stock
W H A T D O V C ’ S O F F E R B E S I D E S C A S H ?
• Your friendly neighborhood VC:- Expertise
- Contacts (their own and the firm’s rolodex)
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A S A S T A R T U P , T H E D U E D I L I G E N C E Y O U C O N D U C T O F T H E V C F I R M S Y O U
I N T E R A C T W I T H S H O U L D B E A T L E A S T A S I N D E P T H A S T H E I R D U E D I L I G E N C E O F
Y O U
H O W D O E S V C W O R K ?
• Size of VC Fund: $130 Million- Institutional LPs: 7 @ $5-30M Each
- Individual LPs: 20 @ $50K - $2M Each
• Initial Investments Over 2-4 Years, Return within 10• On Average, Delivers 30+% Per Year Return
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W H A T S I Z E D E A L W O U L D B E I N T E R E S T I N G ?
W H I C H D O Y O U P R E F E R ?
Suppose you were to invest $10 million…• Fund 1:
• 2x return on all 10 $1M investments
• Fund 2:
• Loses all $1M investments in 8 deals
• Wins 20x on the remaining 2 $1M investments
15Source: Andy Rachleff
H O W D O E S V C M A K E M O N E Y ?
• Size of VC Fund: $130 Million- 2.5% annual management fee
- 20% profit share (aka carried interest)
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I N A 3 X F U N D , H O W M U C H P R O F I T D O T H E L I M I T E D P A R T N E R S M A K E ?
T H E G E N E R A L P A R T N E R S ?