Venture
PE firm life cycle
-PE holding period -rapid growth period -stable growth period
leverage buyout
-PE strategy -acquisition of another company using significant amt of borrowed money -more debt means high risk firms often go bankrupt
flow of funds in venture capital cycle
-VC funds managed by general partners -portfolio companies -exits (sale of port comp to public market or other companies) -limited partners (investors)
angels sometimes form
-bands or clubs to bring in outside investors -contract like VC funds -more transparency and professionalism come at cost (agency/conflicts of interest)
PE illiquidity
-companies held by PE firms often private for several years -no market price observed -PE funds not traded publicly -double illiquidity
private funding sources
-crowdfunding -angels -venture capital funds -buyout funds -distress funds
valuation helps in...
-deal selection -deal structure -risk control of overall portfolio
finance knowledge is important for VCs in
-deal selection, structure, and exit -less monitoring and helping
models of crowdfunding
-donation -rewards/prepurchase -lending/equity (investment)
main role of VC
-find good projects -invest in good projects -monitor and help grow -exit at the right time
crowd-learning
-give out information -attract customers and suppliers -gain knowledge
crowdfunding
-global online centric -exponential growth -post a project pitch and backers pledge money in small amounts
special issues with PE valuation
-illiquidity -information asymmetry -cyclical nature
upsides of crowdfunding
-instead of alternative funding -crowd-learning
downsides of crowdfunding
-lacks key pcm recipe features -lack of control rights -no expert insider position -unprotected shareholders and regulatory oversight can prevent future investors
other private funding sources
-mezanine -growth capital -special situations -geo strategy industry
cyclical nature
-money enters PE firms in cycles -when capital flowing in, valuations increase -capital inflow --> lower required return
angel investor experience
-past entrepreneurs with spare cash -sold own venture -mentor to develop business -experience and network of human and financial capital -intentions can be hard to foresee
gate keepers and advisors
-pension advisors, consultants -placement agents, crowdfunding platforms -info and analytics vendors
Investors who provide money to PE funds
-pension punds -endowments and foundations -sovereign wealth funds -corporations -high net wealth individuals
investing in PE
-restricted to wealthy investors
stages of growth
-seed/startup -early stage -expansion stage -later stage
Top regions for VC investment
-silicon valley new england LA NY metro
causes of inflation
-tech -social changes -monetary policy
angel investors
-wealthy friends and family -likely cheapest and most patient -unintended consequences if venture fails
crowdfunding raised _____ in 2009, _______ in 2014 and ______ in 2015
.5bn 16.2bn 34bn
--But for VCs fees depend NOT on portfolio value but committed capital: why?
1. If fees based on portfolio value it would be less on first few years 2. Fees based on portfolio value creates incentives to invest too quickly 3. Market Values of portfolio difficult to estimate
125 basis points =
1.25%
venture capital boomed in...
2000 (.com bubble) -decreased and stable since -small decrease in 2009
rapid growth span
3-10 years
holding period span
3-7 years
income requirement
300k in income or 1mn in networth
angel investors typically invest
50 to 300 thousand
net invested capital
=invested cpaital - cost basis of all exited and written off investments
between holding and growth period...
IPO
after 5 year investment period
VC only makes follow on investments
who provides bulk of seed capital in US
angel investors
40% of IPOs were
backed by Venture capital firms and 30% buyout backed
crowd-funding often use for projects that...
benefit society
committed capital
capital promised by LPs (investors)
illiquidity should
command a premium
investment capital
committed capital - lifetime fees
VC fees depend on _______ not _______
committed capital NOT portfolio value
most VC funds invested in
communications(biggest boom increase) software media/retail
invested capital
cost basis for the investment capital of the fund that has already been deployed at given poitn
angel investors prelude VC stage but...
difuses owndership structure and may deter VC funds
geostrategy industry
early stage bio tech
where is uber
end of PE holding
professional angel investors are likely to
engage in entrepreneur friendly contracting, more rights allocation
most investing done in ______ stage
expansion
after pension funds who contributes the most
financial institutions and endowments foundations
A VC is a
financial intermediary -take investors money and invest it in a portfolio
investment period
fund invests in portfolio companies for first 5ish years
information asymmetry should
have higher required return (cost of capital)
liquidity risk should make for
higher expected return
fiduciary duty
if clients include pension funds
VC investments are
illiquid -invest in private companies (cannot trade on public exchange) -no simple mark to market
VCs invest to fund
internal growth of companies, NOT acquisitions of existing companies
mezzanine funding
invest in debt
limited partners
investors
title 3 jobs act
investors making less than 100k can invest 10% of income through broker dealer or portal
VC fund
limited partnership with limited lifetime (10ish years)
venture capital funds are the primary intermediary between
long term institutional money and start ups
inflation in the US has been ______ recently
low
general partners
manage investment
VC primary goal
maximize financial return by exiting investments through mergers and IPOs
VC takes an active role in
monitoring and helping companies in their portfolio
JOBS act
non-acredited investors can participate in equity crowdfunding
closed fund
once all committed capital is raised and GP is ready to invest (wont take more money)
how to finance a startup
other peoples money and expertise -angels, business incubators -venture capital funds -crowdfunding
almost half of committed capital comes from
pension funds
long term institutional money
pension funds and endowments
stable growth span
perpetuity or default
VC is a segment of
private equity
early stage PE funded must use
projected complex (subjective forecasts)
early stage companies funded by PE do not have
quantitative metrics like cash flows and price to earnings
venture capital funds size
relatively small but the elite source of start up capital
where is apple in life cucle
stable growth
scott shaines fools gold
the truth behind angel investing in america has some discouraging stories to tell
pre-2009 they raised more than they invested but post 2008
they invested more than they raised (push off IPOs) -less disposable income
lifetime fees
total amt of fees paid over the lifetime of a fund
inflation erodes
value of money
to go directly to conventional PE funds must be able to
write 1m-20 m check
vintage year
year fund raised