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Introduction to Venture Capital and Private Equity
- 1. Introduction & Overview of Venture Capital & Private Equity 12/9/2017 Prof.Rupesh Shah 1
- 2. Venture Capital For A 5Th Grader 12/9/2017 Prof.Rupesh Shah 2
- 8. 1 Year Later Khan KhanKhan 12/9/2017 Prof.Rupesh Shah 8
- 9. Khan Ice cream presents their business to Baskin Robbins KhanKhan 12/9/2017 Prof.Rupesh Shah 9
- 10. Baskin Robbins offers to buy KHAN Ice cream for a lot of money Khan 12/9/2017 Prof.Rupesh Shah 10
- 12. Getting Serious now, where do we begin? Introduction to Venture Capital & Private Equity History of Venture capital industry Evolution How to choose and approach a Venture Capitalist? Structure and terms of Venture Capital and Private Equity firms 12/9/2017 Prof.Rupesh Shah 12
- 13. Venture Capital Venture Capital • An undertaking involved risk OR • Dare to do or Say something • Amount invested by the person/s to carry out the newly established business. 12/9/2017 Prof.Rupesh Shah 13
- 14. Private Equity is a Medium to long term financing Provided in return for an equity stake In potentially high growth Unquoted companies 12/9/2017 Prof.Rupesh Shah 14
- 15. Venture Capital and Private Equity Venture Capitalists EQUITY 12/9/2017 Prof.Rupesh Shah 15
- 16. Venture Capital and Private Equity Investment depends on Rounds Company Valuation Seed Series A Series B Series C 12/9/2017 Prof.Rupesh Shah 16
- 17. Venture Capital and Private Equity Investment amount $ Tens of millions $ Thousands 12/9/2017 Prof.Rupesh Shah 17
- 18. Venture Capital and Private Equity VC firms can provide Expertise Connections Industry Knowledge Strategic Direction 12/9/2017 Prof.Rupesh Shah 18
- 19. Venture Capitalist Board Member Board Member Board Member Board Membe Company CEO 12/9/2017 Prof.Rupesh Shah 19
- 20. Venture Capital and Private Equity Venture Capitalist Fiduciary Duty Investor InvestorInvestorInvestor $1 Billion Potential Investment 12/9/2017 Prof.Rupesh Shah 20
- 21. Venture Capital and Private Equity What VC’s look for in the company High Growth Technology Media Consumer/ Enterprise Driven Companies Scalable Opportunities Dominate a particular market 12/9/2017 Prof.Rupesh Shah 21
- 22. Venture Capital and Private Equity Companies that fit VC funding Mainstream Appeal Unique & Marketable Product Bankable Management Team 12/9/2017 Prof.Rupesh Shah 22
- 23. Venture Capital and Private Equity Venture Capitalists Private Equity $$$ $$$ Equity Equity 12/9/2017 Prof.Rupesh Shah 23
- 24. Venture Capital and Private Equity Venture Capitalists Private Equity Life Stage Life Stage MidEarly Later 12/9/2017 Prof.Rupesh Shah 24
- 25. Venture Capital and Private Equity Private Equity Life Stage Later Growth Trajectory Management Turnover Company Turnaround 12/9/2017 Prof.Rupesh Shah 25
- 26. Venture Capital and Private Equity Private Equity $$$12/9/2017 Prof.Rupesh Shah 26
- 27. Venture Capital and Private Equity Private Equity Other Types Of Investments Growth Capital Venture Capital Buyout 12/9/2017 Prof.Rupesh Shah 27
- 28. Venture Capital and Private Equity Private Equity Investments Strategy Holding Period Returns Initial Investment Shareholder Returns 12/9/2017 Prof.Rupesh Shah 28
- 29. Major Similarities and Differences in venture capital and private equity Private Equity Venture Capital Investments Include Depends on strategy, but typically includes larger, mature, private companies that are underperforming or undervalued. Startups, small to medium size enterprises, typically in pre-revenue stages Funding Structure Equity & debt Equity only Investment sizes Large investments, anywhere from $100million to tens of billions. $50000 to $5 million Fee structure 2/20 fee structure (LP’s typically pay VC’s 2% annual management fee on committed capital, & 20% carry on any investment profits) 2/20 fee structure (LP’s typically pay VC’s 2% annual management fee on committed capital, & 20% carry on any investment profits) How investors (LP’s) make returns When PE firms exit their investments, sell companies for a higher price than what they paid to purchase them When cash returned on liquidity events (i.e. startup gets acquired, exits, IPO’s) Investment Horizon (Lockup period) Typically 10 years Typically 10 years Liquidity Very Illiquid Very Illiquid Top Concerns Investor (LP’s) Have Fees, economic environment (due to use of leverage), Illiquidity Fees, Valuations, Illiquidity 12/9/2017 Prof.Rupesh Shah 29
- 30. Introduction to Venture Capital & Private Equity History of Venture capital industry Evolution How to choose and approach a Venture Capitalist? Structure and terms of Venture Capital and Private Equity firms 12/9/2017 Prof.Rupesh Shah 30
- 31. Historical Evolution of Venture Capital Stage 1: 1987-1994 Setting-up of TDICI & Regional Funds Stage 2: 1995-1998 Entry of Foreign Venture Capital Funds Stage 3: 2000 Onwards Emergence of successful India-centric VC Firms Stage 4 : Current Global VC’s and PE firms actively investing in India The development of the organized venture capital industry in India, as in existence today, was slow and belabored, circumscribed by resource constraints resulting from the overall framework of the socialistic economic paradigms. Funding from banks and other FI’s was provided as collateral- based money on project financing basis, which made it difficult for most new entrepreneurs, especially those who were technology and service based, to raise money for the ideas and businesses. 12/9/2017 Prof.Rupesh Shah 31
- 32. Introduction to Venture Capital & Private Equity History of Venture capital industry Evolution How to choose and approach a Venture Capitalist? Structure and terms of Venture Capital and Private Equity firms 12/9/2017 Prof.Rupesh Shah 32
- 33. To identify a suitable VC, you have to make up your mind about five main selection criteria:- Name and Reputation of the Venture Capitalists Development Phase of the Company Industry Sector of Firm and Venture Capitalists Required Financing Volume Location of the Venture Capitalists 12/9/2017 Prof.Rupesh Shah 33
- 34. Tips for Finding Venture Funding Don’t say venture capital when you mean angel investment, or friends and family. Don’t do anything in bulk Do your research first Forget the businesses that prey on hopeful entrepreneurs by selling databases and leads and such Approach a select few target VC firms only one at a time, carefully. Have an extremely good tag line and instant summary. Have an extremely good quick video or a one-page summary, and send that as the follow-on email when you talk with a VC or get an introduction. If your summary video—or summary memo—works, then the next step is a pitch. Have a business plan ready before you finish the summary or the pitch. Expect the process to take way longer than you think it will. (Bonus tip) Never EVER spend investment money before the check clears the bank. Deals fall through all the time. (The most important tip in the entire list, even though I put it last) Choose an investor like you’d choose a spouse. 12/9/2017 Prof.Rupesh Shah 34
- 35. Introduction to Venture Capital & Private Equity History of Venture capital industry Evolution How to choose and approach Venture Capitalist? Structure and terms of Venture Capital and Private Equity firms 12/9/2017 Prof.Rupesh Shah 35
- 36. Private Equity/ Venture Capital Structure General Partner Limited Partner (family offices, pension funds, foundations, endowments, fund-of funds, sovereign wealth funds, high net- worth individuals) Provides capital, advice, introductions Provides capital Private Equity Fund/ Venture Capital Fund (Limited Partnership) Investment A Investment B Investment C Investment D 12/9/2017 Prof.Rupesh Shah 36
- 37. 12/9/2017 Prof.Rupesh Shah 37
Editor's Notes
- Venture capital firm or VC’s work in the similar fashion as angel investors. However they usually only come into play when a company is looking for a large round of financing in exchange of equity in the business
- The amount invested depend on the round Example seed, series A, Series B, etc. and valuation of the company
- That can range from thousands to tens of millions of dollars
- VC firms can provide valuable expertise, strategic direction and business connections in addition to their initial capital investment. VC often invest in a particular industry that they are knowledgeable about or previously they have worked in
- It is not uncommon for VC’s to take a seat on a companies board to provide direct oversight and ensure that right corporate decision are made.
- It is important to understand that VC’s have fiduciary duty to their investor in their fund and always looking for strong returns And infact some may even only invest in the businesses having billion $ potential
- Most VC’s now a days seek high growth technology, media, consumer or enterprise driven companies that can create large scalable opportunities with a potential to dominate a particular market.
- But if you are a company with broad mainstream appeal that can create a unique and marketable product Or services and have a bankable management team on board just might be worth a try.
- Don’t confuse venture capital and private equity remember that both are investing in a company In return for equity ownership of your business but there are important differences.
- One way to look at the difference between the two is that VC’s typically look to invest in companies That are early to mid stage in their life cycle Private Equity firms are sometimes looking to take equity of more established later stage companies.
- Later stage companies that are in a growth trajectory in which they may be heading towards going public. Are in need of management turnover Or simply in need of a turnaround. Example:- Public company that will be suited better as a private company like dell computer.
- Many of the larger private equity firms focus on businesses that are in distress and in need of significant change Or have assets that are underutilized. They invest in the trouble companies if they feel they can turnaround profitability.
- Other firms may have portfolio of funds that each focus on different types of investments
- Private equity firms typically define their investments strategy and holding period through their firm investment chartered strategy Which is a game plan to return shareholders value over specific time horizon.
- TDICI-Technology Development and Information Company of India Ltd. Source: http://www.smoothridetoventurecapital.com/PVI.A02_Venture.Capital.Industry.in.India.pdf
- Name and Reputation of the Venture Capitalists Venture Capitalists have different reputations, which are i.e. based on experience, expertise and past performance of the VC. The name and reputation of a VC often reflect on young companies and influence future financing rounds. High-reputation affiliates usually create signaling and substantive value to your venture. Be aware of the reputation of your potential partners, it will be associated with your company! Development Phase of the Company Different VCs finance different development phases of young companies. Depending on whether your venture is in the seed, start-up or expansion phase, you have to find the right investors, which are typically financing companies of your state. Industry Sector of Firm and Venture Capitalists Venture Capitalists sometimes have a specialization on a certain industry sector. Spectrum industry (total assets: $5.7 billion) i.e. focuses on information economy, whereas Greylock Partners (total assets: $2.0 billion) places the emphasis on medical devices. You should mainly search for VCs which are focusing on your company’s sector to increase the chances that you will receive funding. Required Financing Volume Different VCs invest different amounts. You have to determine for yourself which amount you are seeking for and finally aiming for a VC who is willing to pay the amount you demand. Location of the Venture Capitalists Finally, you should target VCs that are geographically close to your company’s offices. The rule of thumb is that a company should be reached within two hours. If this requirement is not fulfilled, the chances of funding are decreasing dramatically. After identifying and selecting the right VC for your company, you have to approach VCs properly, including giving the pitch, which might change your life forever! Do you want to learn how to pitch? And do you want to know how to finally close the deal?
- 1. Don’t say venture capital when you mean angel investment, or friends and family. Many people do that. Venture capital is a subset of outside investment, and the hardest to get. If you have to ask whether your startup is a venture capital candidate, then it probably isn’t. 2. Don’t do anything in bulk. Avoid email templates like the plague. Don’t think for a minute that any serious investor would ever read a summary memo, or watch a pitch, much less read a business plan, when it looks like it’s being sent in bulk to multiple investors. That idea dates back to the 1980s when people imagined that VCs were looking at business plans coming in unsolicited. Actually, they weren’t, but sometimes they pretended they were. Not anymore. 3. Do your research first. Identify a select few VC firms that invest the amount you need, in your industry, at your stage of development, in your region. Venture capital firms each have their unique interests, identities, and personalities. They have preferences about where they invest, at what stage, and what amounts. Most of them have websites, and most of the websites announce their preferences. They don’t want to deal with people who aren’t in their category and don’t know it. They expect you to know. 4. Forget the businesses that prey on hopeful entrepreneurs by selling databases and leads and such. Those contacts are already rubbed raw by unsolicited emails and phone calls. It doesn’t work that way; it has to be one at a time. Furthermore, on a related subject, those businesses that take your money with the pretense that VCs will browse your summary and find you are cheating you. The deals chase the money; the money doesn’t chase the deals. 5. Approach a select few target VC firms only one at a time, carefully. Be patient. Look first for introductions by checking out people you know who might know them, alumni relationships, business associations, their public speaking dates, any contacts in the companies in which they’ve already invested. Don’t be afraid to submit using their website form or call their switchboards, but keep that as a last resort. Your chances are way better if you fit their normal profile and you’ve been able to meet one of the partners, or get an introduction from somebody they know. 6. Have an extremely good tag line and instant summary. Start with the elevator pitch and get the key points down, but the theoretical 60 seconds of the classic elevator pitch is too much. You need to be able to describe your business in a sentence or two and that sentence has to be intriguing. People have had success with “the [some well-known business] of [some new business area].” For example, Alibaba was called “The Amazon.com of China.” I ran into a company calling itself “the Netflix of kids’ toys,” and with that, the idea was instantly clear 7. Have an extremely good quick video or a one-page summary, and send that as the follow-on email when you talk with a VC or get an introduction. Expect the real information exchange to happen in email. The expected follow up to that quick three sentences is a summary, in email. These days a great video works better than an email summary. Keep it secure, not public, and a simple password system like Vimeo or one of its competitors is best. The YouTube email-based permissions are risky because everybody has too many email addresses these days, and confusion is risky. Make it seamless. And I like the liveplan pitch too, but I also have to disclose, as I write that, that I’m biased. I have an interest in LivePlan. 8. If your summary video—or summary memo—works, then the next step is a pitch. In practice, what happens is there is a contact, you send the follow-up video or summary, and then you wait, anxiously, to be invited to pitch. The pitch is a slide deck, yes, but that’s not what matters; it’s the VCs chance to meet you, check you out, see your team, and hear your story. There’s a lot about the pitches on this website. 9. Have a business plan ready before you finish the summary or the pitch. The business plan is the screenplay, the pitch is the movie. Don’t do the plan too big or too formal because it’s not going to last and should never be older than two to four weeks. Don’t swallow the myth about investors not reading your plan. The truth at the core of that myth is that investors will reject your business without reading your plan. But they won’t invest in it without reading the plan. No business gets money without going through rigorous study and examination first (they call that “due diligence”) and the plan is the active document for the due diligence. Although, for the record, there are some exceptions. When a well-known successful entrepreneur, the people we read about in the headlines, takes a new business to VCs those people will often get the investment without the same due diligence. VCs do compete for those deals. And unfortunately, those people, the stars, will then tell the rest of us that investors don’t read plans. 10. Expect the process to take way longer than you think it will. Due diligence alone will be several months of unending request for more documentation. When VCs say yes they really mean maybe, and when they say maybe they really mean no.