Venture Capital Investment

Convertible Note

A kind of financial instrument that, under certain conditions specified in the investment agreement, converts from a debt owed to the investor to equity in the company owned by the investor.

The two common fund structures for equity funds:

Limited Partnerships Open-ended corporate structures (aka evergreen funds)

Partner

Partners have a similar job description to Principals and Venture Partners. They also sit on the boards of portfolio companies and spend much of their time networking. Partners are tasked with more high-level duties.

Duties of an Analyst:

Primary role of analysts is to network and serve as the venture firm's "boots on the ground" in an intelligence-gathering capacity. Analysts are also tasked with 1. performing preliminary screening, 2. business analysis, 3. and market research.

Principal

Principals will typically sit on a few boards of the fund's portfolio companies and will help scout out opportunities for these companies to be acquired.

Private Equity Investor

Private Equity Investors are institutional investors who deploy relatively large amounts of capital into later-stage technology companies to fuel expansion, finance M&A activity, or to tide the company over prior to their initial public offering.

Venture Partner

Someone who a VC firm brings on board to help them do investments and manage them, but is not a full and permanent member of the partnership.

Term Sheet

Summary of the investment terms and conditions and the structure of a partnership accompanying an investment.

Accredited Investor

an organization or individual investor who meets certain criteria established by the SEC and so qualifies to invest in unregistered securities

Private Equity

ownership assets that aren't publicly traded; includes venture capital

Main differences between Private Equity and VC?

1. Different size companies (Risk level), 2. Different amounts of money invested, 3. Different percentage claimed of companies.

Forms of Exiting:

1. IPO, 2.

Aspects of an Investment Thesis:

1. Industry/geography, 2. Team profile, 3. Fund size, 4. Investment stage, 5. Investment amount, 6. Co-investors & partnerships, 7. Market size, 8. Branding, and 9. Model of returns.

Three (3) investment traits to consider:

1. Management Team, 2. Technology, 3. Product

Ways to Harvest Returns:

1. Mergers and acquisitions, 2. initial public offerings, 3. technology licensing agreements, 4. and other

7 Investment Stages:

1. Seed, 2. Angels, 3. Early stage, 4. Round 1, 5. Round 2, 6. Round 3, and 7. Mezzanine.

Duties of a Partner

1. identifying emerging technology sectors in which the firm will invest, 2. identifying and developing rapport with key players in those sectors, 3. assessing and communicating fund performance to limited partners and, 4. every five to seven years or so, raising another fund.

What is the return on a 10x deal over 10 years?

100x (10x each year building)

What is the typical management fee?

2.5%

Exit Strategy

A contingency plan to liquidate a position in a financial asset once a predetermined criteria has been met/exceeded.

Angel Fund

A formal or informal assemblage of active angel investors who cooperate in some part of the investment process. Controlled by member angels (who manage the entity or have control over the entity's managers), and investments are decided jointly as a group, versus individually when the angels were investing alone.

Venture Capital Fund

A pool of capital raised periodically by a private equity organization. Invests in companies in the start-up phase with the intent that they grow into profitable companies and the investment is sold at an IPO. Create wealth from a management fee (2%) and carried interest (carry).

Pension Fund

A pooled investment fund run by an intermediary on behalf of a government or corporation for the purpose of providing pensions to employees. Typically, pension funds deploy their assets into venture capital as part of their risk capital investment strategy.

Accelerator

A program that aims to accelerate the growth of startup companies through mentorship, brokering connections, and providing services and infrastructure (such as office space) for small portions of equity in participating companies.

Cash on Cash Return

A simplified method for calculating return by dividing the total amount of money received from an investment by the amount initially committed.

Financing Round or Round

A type of securities offering wherein a company receives capital from investors in exchange for equity, as a loan, or in some other financial arrangement. The standard naming scheme is to label each round with a letter from the alphabet, starting with "A".

Difference between Accelerators and Incubators:

Accelerators = short time frame Quick growth Require percentage of capital Incubators = indefinite/undefined time frame Preparation for accelerator No percentage of capital

Cash-on-Cash Return Ex.)

An investor commits $10 million to a given portfolio company. The portfolio company is acquired and the investor receives $50 million in proceeds from the acquisition, meaning that the Cash-on-Cash Return (or MOIC) of the investment was 500%.

Limited Partner (LP)

An investor into a limited partnership, such as a venture capital fund. Limited partners can monitor the partnership's progress but cannot become involved in its day-to-day management if they are to retain limited liability.

Investment Thesis

An investor's individual strategy to help determine which companies to invest in. A roadmap to discipline an investor to only invest in companies that conform to the philosophy. A clear indicator to startup founders of what type of investments each investor is interested in.

Associate

Associate roles are the next rung up on the hierarchy. These positions are typically "partner track" and open to applicants with graduate degrees.

Duties of an Associate:

Associates are usually tasked with 1. due diligence research, 2. obtaining progress reports from portfolio companies, 3. and acting as the intermediary between investment prospects and the partners who make final investment decisions.

WHat percentage of funds fail, break even, and are successful in returns?

Failure: 50% Break even: 30% Success: 20%

Analyst

The most junior people at a venture capital firm.

Syndicate

The network of investors that are also participating in a given round.

J Curve

High early costs, large growth

Parallel Fund

In some circumstances, the fund may be setup as a couple of funds that invest in parallel into portfolio companies. These may be created for Investment Company Act purposes (such as 3(c)(1) and 3(c)(7) funds) or to allow the fund manager's principals and affiliates to invest in the fund on a no-load basis (i.e., without charging themselves management fee or carried interest).

Venture Capitalist

Institutional investors who deploy capital into private, early-stage technology companies. Venture Capitalists are usually the next group of investors to commit capital after Seed Investors. Venture Capitalists are a subset of private equity investors.

Seed Investors

Institutional investors who deploy capital into very early-stage startup companies. Seed investors are considered a subset of venture capitalists.

Management Fees

The 'cost of having your assets professionally managed'. The annual fee the venture fund charges for its management services, typically 2% of assets under management.

IRR

The annualized effective compounded return rate that can be earned on the invested capital, otherwise known as the investment's yield. The longer the money is tied up in an investment, the higher the multiple of the original investment that must be returned to have an adequate return.

Due Diligence

The exercise of reasonable care in the evaluation of a business opportunity prior to making an investment, forming a business partnership, or other long-term binding agreement.

Anti-dilution Provisions

The financial mechanisms placed into a preferred stock agreement to maintain the investor's percentage share in the company if the company raises a future round at a valuation lower than the one at which the preferred shareholder purchased the shares.

Endowment Fund

The long-term pool of financial assets held by many universities, hospitals, foundations and other nonprofit institutions.

What does the Management Fee pay?

The management fee is used to pay base salaries, rent, legal and other service fees, marketing costs, and other incidental expenses the fund may incur over the course of its management.

Harvest Period

The period in which the fund begins to see returns from its investments through mergers and acquisitions, initial public offerings, technology licensing agreements, and other means.

Investment period

The period in which the fund deploys the majority of its capital into its portfolio companies, which is typically somewhere between 3 and 5 years.

Lead Investor

The principal provider of capital in a given financing round, typically the same firm from round to round.

Post-Money Valuation

The product of the price paid per share in a financing round and the shares outstanding after the financing round. As a rule of thumb, the pre-money value plus the new money raised.

J Curve Graph

The shape of the Internal Rate of Return curve over the course of the fund's lifecycle, encompassing both the investment period and the harvest period.

"Carry"

The share of the profits of an investment or investment fund that is paid to the investment manager in excess of the amount that the manager contributes to the partnership.

Carried Interest ("Carry")

The share of the profits of an investment that is paid to the investment manager in excess of the amount that he/she contributes to the partnership. Charged by the firm on the profits generated on a particular investment, typically 20% (20% of the profits go to the general partners, 80% belongs to the limited partners). This serves to align the interests of limited partners with the general partners managing the fund (80/20 Rule).

Assets Under Management (AUM)

The total market value of the financial assets which the venture capital fund manages on behalf of its limited partners.

Pre-Money Valuation

The valuation placed on a company prior to any additional investment in its current financing round.

General Partner

This entity is the decision maker for the fund and also receives the carried interest paid by the fund (i.e., 20% of profits in a typical "2 and 20" fund).

Fund

This is the main venture capital fund entity that makes investments in other companies.

Fund Term

VCs raise a finite amount of money and operate for a finite period of time. General partners must convince some organizations to invest in the fund with the promise of big returns (between 5X and 10X) in a certain period of time (usually 10 years). Once the target fund size has been reached, that capital is under the fund's management, usually for a period of 10 years. Fund managers usually have the option to extend the fund's term by 2 to 3 years.

Angel Investors

Wealthy individuals in the business community willing to risk investment funds on a promising business venture Difference from VC is that they invest their own money

Incubator

With mentorship periods often lasting more than a year and a half, incubators focus less on quick growth and have no specific goal in mind for your company other than to become successful at the right pace. In fact, the goal of some incubators may be to prepare your company for an accelerator program. Incubators take little to no equity in your company, and can afford to because they do not provide upfront capital like accelerators.

Fund of Funds (FOF)

___ invest in the portfolios of hedge funds. A typical fee used to be 1 plus 10% and is now lower. A____is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities.

Private Equity Firms

financial intermediary that invests in equities that are not traded on the public capital markets. Invests in mature companies with the intent to streamline operations to increase revenues and then sell at an IPO. Private equity firms mostly buy 100% ownership of the companies.