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