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- Emer Dooley
- October 5th 2005
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- 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)
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- 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
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- Out of every 10 investments
- 3 go bankrupt
- 2-4 living dead
- 2 solid
- 1 returns the fund
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- 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 $7-8m per company
- Stopped charging management fees after year 4
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- Key Questions:
- What have they done
- Who do they know
- Can they work together and with investors,
- Do they know their weaknesses/holes
- 99% of business plans are WRONG – can this team adapt?
- 2001 VCIC Judge’s feedback to UW:
- “Three most important criteria in evaluating an investment opportunity:
- Management
- Management
- Management …”
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- How big is market segment?
- Avoid those “$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
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- Is the product customer centric?
- Is the target customer clearly understood
- 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
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- 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?
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- 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?
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- 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 !
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