Class 5 (Chapters 6 and 7)

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Class 5 (Chapters 6 and 7)

• Based on Andrew Metricks Slides

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Returns and Investment
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What Do VCs Do?

• Investing
• Monitoring
• Board representation
• Corporate Governance
• Human Resources
• Matchmaking
• Strategy
• Exiting

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Venture Capital Outside of the US
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Ratio of IPOs (thousands) to GDP (millions)
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Time to start a business, in days
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Index of protections against self-dealing
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Sovereign spread of dollar-denominated bonds
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Entrepreneurial self-confidence
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Global CAPM

• Global CAPM Ri Rf ß(Rm - Rf)
• where ß is the factor loading on the global
  market, and Rm - Rf is the expected risk premium
  on that market.

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Global CAPM in practice

• In practice, we estimate a global ß in many
  countries as ß ßc ßd, ,where
• ßc beta of country relative to U.S. market
  (country beta), and
• ßd beta of U.S. industry relative to U.S.
  market (domestic beta)

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Example

• Bankco, a multinational financial services
  company based in the United States, is
  considering a consumer-banking investment in
  Brazil.
• Problems
• a) Use the betas.xls file to estimate the beta
  for this investment.
• b) With a risk-free rate of 4 percent and a
  global risk premium of 7 percent, what is the
  estimated cost of capital for this investment?

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Volatility ratios and country betas
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Objections and extensions

• Style effects
• Currency risk
• Country risk
• Segmented markets

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The global PSM

• Rit Rft a
• ßc ß (Rmt Rft)
• ßsize SIZEt
• ßvalue VALUEt
• ßliq LIQt
• 4 ßc 11.2

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PORTFOLIO COMPANY STATUS OVER TIMEFIRST ROUNDS
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PORTFOLIO COMPANY STATUS OVER TIME, ASSUMING NO
PRIVATE COMPANIES AFTER TEN YEARS, 1ST ROUNDS
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VALUE MULTIPLES FOR FIRST-ROUND INVESTMENTSIPOS
AND ACQUISITIONS
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VALUE MULTIPLES ALL FIRST-ROUND INVESTMENTS
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PORTFOLIO COMPANY STATUS OVER TIME, ASSUMING NO
PRIVATE COMPANIES AFTER TEN YEARS (2ND ROUNDS)
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VALUE MULTIPLES FOR SECOND-ROUND INVESTMENTS
IPOS AND ACQUISITIONS
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VALUE MULTIPLES FOR ALL SECOND-ROUND INVESTMENTS
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PORTFOLIO COMPANY STATUS OVER TIME, ASSUMING NO
PRIVATE COMPANIES AFTER TEN YEARS (3RD ROUNDS)
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VALUE MULTIPLES FOR LATER-ROUND INVESTMENTS
IPOS AND ACQUISITIONS
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VALUE MULTIPLES FOR ALL LATER-ROUND INVESTMENTS
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VC Financing and IPOS by Year IPO Exits Lead VC
Rounds
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THE INVESTMENT PROCESS

• Screening 100-1000
• ?
• Preliminary Due Diligence 10
• ?
• Term Sheet 3
• ?
• Final Due Diligence 2
• ?
• Closing 1