Venture Capital

How do VCs make money? Explain selection and their differences in objectives of investment activities.

Selection: capacity to select firms with high potential of fast growth. VCs are able to deal to information asymmetries (ex-ante) —> They have superior screening capabilities: specialization and syndication. Differences in objectives of investment activities: — Financial objectives — Strategic objectives — Ability to mobilize resources and capabilities

What are the 4 exit strategies for a VC?

1. IPO: invest in a company, grow it, sell when it becomes listed. 2. Trade sale: sell to another company or fund (such as YouTube sold to google). 3. Sale to entrepreneur: invest in a company, grow it, sell back to the entrepreneur you bought it from. 4. Bankruptcy/Liquidation: if the investment in unsuccessful l, VC could lose the money they invested.

What are 4 different VC investor types?

1. Independent Venture Capital (IVC) 2. Corporate Venture Capital (CVC) 3. Bank-controlled Venture Capital (BVC) 4. Govermental Venture Capital (GVC)

What is IVC?

1. Independent Venture Capital (IVC) — US style limited partnership — High intensity of financial objectives — Strategy: raise capital from institutional investors — Target: companies not in the seed stage with scaleable or specific business with the potential of high return in the medium run. — More specialized in relatively distant companies — Capabilities and business contacts of the IVC investor — Example: Sequoia Capital

What are the two characteristics VCs look for in a target company? Give an example for each.

1. Scalability Example: Uber — Platform allowed for fast growth with low costs. No cars owned by Uber and no driver employed by Uber which allows number of users to increase with no incremental cost. 2. Specificity Example: GenEdit is a biotech firm that provides a specific solution to an existing need. It provides therapeutics for genetic diseases.

What are 5 ways VC investors can differ from one another?

1. Size 2. Investment experience 3. Cross-border investment activity 4. Governance 5. Existence and nature of parent company

What is CVC?

2. Corporate Venture Capital (CVC) — Affiliated to a non-financial corporation — Low intensity of financial objectives — Strategy: gain access to advanced technologies — Target: companies with high technological ferment — Resources and business contacts of the parent company — Example: Google Venture Capital

What is BVC?

3. Bank-controlled Venture Capital (BVC) — Affiliated to a financial intermediary — Low intensity of financial objectives — Strategy: generate demand for bank services — Target: local companies with interest in establishing future bank relationships — More specialized in larger and older companies, closer to IPOs — More passive investment strategy and shorter investment duration — Resources and business contacts of the parent bank — Example: Deutsche Invest Venture Capital

What is GVC?

4. Govermental Venture Capital (GVC) — Government owned management company — Low intensity of financial objectives — Strategy: social and political objectives, job generation and local development — Target: local investments created to implement regional development activities — Specialized in investments that are not attractive for other investor types — Longer investment duration — Capabilities and business contacts of the PVC investor — Example: FinLombarda

Explain specificity

A business with high level of specificity is based on unique or hard-to-replicate knowledge. Investors looking for high specificity in a business bet on the profitability of the business to perfectly fit a market demand which is well-known, yet not fulfilled. — Is the business model based on unique knowledge in the industry? — Is the business model hard for a competition to replicate? — Is the business model difficult to understand for the general public? — Is the business model offering a more efficient way to satisfy an existing need? — How elastic is the market demand which the business model aims to satisfy?

Explain scalability

A scalable business model's strength lies in ability of detecting high demand potential. Investors looking for high scalability bet on the profitability of the business to anticipate market's needs by creating new market demand. — How easy is the business growing? — How sophisticated and costly are the resources needed to grow the business? — Is the business capable of multiplying revenue with minimal incremental cost? — Is the business expected to handle increased market demands? — Does the network play a role in determining the growth of a business?

How do things change when an entrepreneur takes on a VC? Any drawbacks?

Change in governance: — Substantial infusion of financial resources — Professionalization: enlargement and improvement of firm's resources and capabilities due to coaching from VC investor and its network of business contacts Drawback: — increased agency costs as the financial or strategic objectives of VC investors may diverge from those of firm's owner/managers.

What is the investment size for a VC? What does it depend on?

Tends to focus on larger deals the BAs (at least 1 million EUR). Investment size depends on: - Minimum amount: the larger the fund the larger the minimum investment size. - Maximum amount: often 10% of the entire fund in one project.

What is the VCs investment style?

They invest someone else's funds (general partners invest limited partners funds). Sophisticated contracts. Provide capital to firms that: - are in their early stages, - have high potential, - high risk entrepreneurial ventures. The goal is to raise capital gains in the medium term.

How do VCs make money? Explain treatment and their differences in objectives of investment activities.

Treatment: providing expertise to grow the business. VCs are able to deal to information asymmetries (ex-post) —> Intensive monitoring (hands on investors). Differences in objectives of investment activities: — Growth — Successful exit — Innovation — Value added (coaching)

What is the VC process? Who are the two main players involved?

VC funds are made up of: 1. Limited partners (investors): provide capital to the fund and receive 80% of returns. 2. General partners (management, the VC firm itself): decide which firms to invest in and receives 20% of returns. Limited partners also pay a 2% management fee to general partners. Investments generally last 10 years at which point VCs sell their equity. Returns are generated by the difference in price.

What do VCs look for when they invest? Which sectors?

VCs investment motivation is is firms and industries that have a fast growth rate such as in fintech and enterprise software sectors.

What is venture capital? List 4 key characteristics.

Venture capital is a subset of private equity and refers to equity investments made for the launch, early development, or expansion of a business. - Private and intermediated: capital is from private investors; investors do not choose which firms to invest in, rather they choose which funds to invest in, and the the funds pool the resources of many investors and chooses the firm. - Independently managed, dedicated pools of capital that focus in equity or equity-linked investments in privately held, high growth companies. - Fundamental for the development of high-potential innovative entrepreneurial ventures and economic growth. - Management is left to the entrepreneurs. VC injects capital for a percentage of equity.