Venture Capital Midterm

Who are the venture capitalists in the moonshot/VC metaphor?

Mission Control

In what situation do liquidation preferences have the most impact?

Poor exit

Venture capital is private equity investments.

Private equity is an illiquid asset. Venture capitalists can take an active role in their investments. VCs are purchasing newly created preferred shares.

Why do VC's work backwards from the exit?

The estimated exit valuation is the number form which VCs can reverse engineer through several rounds of investments to predict how much money they should invest in now (Series A) and later (Series B,C ....) in order to make a specific return on investment.

The source of funds being invested is the main difference between venture capital firms and angel investors

True

T/F: Venture capitalists are usually not diluted by option pools.

True. By convention, option pools are added pre-investment, diluting early shareholders, not the current investors.

Venture Capital is Institutional.

University endowments, state employee pension funds, corporations, financial institutions. VCs have a fiduciary duty to maximize the returns for their investors (who invest in the fund.)

What does "preferred" mean for the equity VC's receive?

VC's have special rights that common shareholders do not have

What is the fuel in the Moonshot VC metaphor?

Venture Capital

What is the difference between buying stocks on the NYSE and investing in VC?

When you buy/sell on the NYSE, you are trading stocks. When you invest in a start-up, new shares are created.

Why would founders not want to raise as much money as possible in early funding rounds?

Founders want to avoid dilution. If they can hit milestones with less money, then the valuation of their company is going to increase while they still own the majority of the company. If they have to rely on larger investments, their proportion of ownership will decrease.

Why might you need a large option pool after a round of venture financing?

In order to be able to recruit highly skilled employees in the future

What is average investment per start-up?

$10M

What are the 4 stages of the VC job cycle?

1. Fundraise 2. Invest 3. Grow 4. Exit

What are the key founding principles of VC?

1. Hits Driven 2. Failure is part of the process 3. Free Market for Talent 3. Sharing Equity

3 ways in which VCs differ from public stock

1. Illiquid 2. Active participation 3. Issuance of new preferred shares at negotiated price

What is venture capital?

1. Institutional 2. Private Equity Investments 3. High Growth Start-Ups

Benefits of Syndication

1. Lowered capital risk 2. Sanity Check 3. Access to more resources

Average ownership per start-up

20-40%

How much equity would a VC have in a startup after a 5 on 10 round? How about with a 20% option pool?

33%, 33%

What are the founders in Moonshot VC metaphor?

Astronauts

What is dilution?

Dilution is the lowering of overall percent ownership caused by issuing new shares.

When does a convertible note "convert" from debt to equity?

During the next round of equity funding.

Which of the following are examples of hit-driven industries?

Entertainment, Oil Drilling, Pharmaceutical R&D

What is the moon in the Moonshot/VC metaphor?

Exit

What represents the start-up in the Moonshot VC metaphor?

Spaceship

T/F Reserve 2/3x to remain pro-rata

True

T/F: Debt is considered cheap money if things go well.

True