1	Venture Capital: Emer Dooley October 5^th 2005
2	The Venture Capital Industry What Venture Capitalists Do: Invest directly in new and rapidly-growing private companies in exchange for equity Raise money from corporations, financial institutions, private foundations, and high net-worth individuals Sit on the Board of Directors and add value to the company through active participation and industry expertise Take higher risks and sacrifice short-term liquidity with the expectation of higher rewards in the long-term Make money through management fees (typically 1 - 2.5% of the fund’s capital commitments) and carried interest (typically 15 - 30% of gross profits)
3	Overview of Sources of Risk Capital
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5	The Venture Capital Industry
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9	How VCs make money Amount raised $100m Less management fees (2% p.a.) $ 20m Capital available for investment $ 80m Profit (20% p.a for 5 years) $199m Net profit $ 99m 20% for GPs $ 20m
10	Lifecycle of a company in a VC fund Out of every 10 investments 3 go bankrupt 2-4 living dead 2 solid 1 returns the fund
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13	M&A and IPO activity
14	Sample early-stage Seattle Fund Fund raised $200m 6 years ago 80% invested Planned to invest in 15-20 companies Allocated up to $12m per company Invested in 24 companies Actual reserve is about $7-8m per company Stopped charging management fees after year 4
15	How investment works
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17	Attributes of a VC “Fundable” Business
18	People – The #1 Element Key Questions: What have they done Who do they know Can they work together and with investors, Do they know their weaknesses/holes 99% of business plans are WRONG – can this team adapt? 2001 VCIC Judge’s feedback to UW: “Three most important criteria in evaluating an investment opportunity: Management Management Management …”
19	Market Opportunity How big is market segment? Avoid those “$zero billion dollar opportunities” What is a realistic range of exit opportunities (can the market support a big exit? How much room is there for others?) How fast is it growing? How differentiated is the offering? Are the structural dynamics positive? Is the market need clear and conclusive? Be mindful of: Competitive landscape Market adoption
20	Product / Service Is the product customer centric? Is the target customer clearly understood Pain points Does the customer know they need the product? Are they aware of the specific pain? Does the product enable the customer to: Make money Save money Save time
21	Technology / IP Is the technology proprietary and unique (the “IP” factor)? Does the technology have a competitive advantage? Is the advantage sustainable? Is the completion of the product/technology independent of other company’s advances? Can the technology be easily duplicated? Look beyond patents for “defensibility” Are there competing standards?
22	Business Model Does the business model make sense? What is the product-pricing model? Can the revenue forecast be achieved? How scalable is the business? What are the assumptions and key drivers of the business model? Both revenue and expenses How is the product sold (channels)? Is the sales cycle reasonable? Is there huge dependence on specific vendor relationships? DF/Cisco example
23	Attributes of a VC “Fundable” Business
24	The Deal Use of funds, and how long will the $ last Realistic financial projections that demonstrate a viable business opportunity Capital structure that will promote future predictable financings Valuation – What % of company being sold, at what price Many times not explicitly described More to come on Valuation (Bill Ericson, GP of MDV) Other equity terms rarely covered in Biz plan All parties need to think it’s a good deal !