Professional Venture Capital and Angel Network Lecture

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Professional Venture Capital and Angel Network
Lecture

• Mgt 354, Fall 2008
• Galbraith

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History of Venture Capital

• 1960s to early 1980s
• Individuals (now called angels)
• Money for equity
• Based upon technology
• Early 1980s to late 1980s
• Real estate money
• Formed partnerships to spread risk
• Required business plan

• Late 1980s to present time
• Institutional money
• OPM (other people money)
• Risk adverse
• Invest primarily in track record
• Money finders v. VC firms

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Equity Capital Process
Seed Money
1st Round Financing
2nd Round Financing
Clean-up Financing
50k 1 million 3 million
1 million
Year 1 Year 3
Year 5
Private Investment Venture Capital Firms
Milestones and Benchmarks
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Angel Investors

• Individuals or Networks
• Formal (Tech Coast Angels) or More Informal
  (Wilmington Investors Network)
• Typically invest 250,000 to 1,000,000
• Series A and Series B investment
• Appointment to Board
• Pre-VC investments
• Due-Diligence
• Typically Partner with other Angel Networks
• Active Capital

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Wilmington Investor Network

• http//www.wilmingtoninvestor.com/

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Formal Venture Capital Funds
Or vulture capital?
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SOLICITING INVESTMENTS Suppliers of Venture
Capital 25-Year Average
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Useful Terms

• Carried Interest
• portion of profits paid to the professional
  venture capitalist as incentive compensation
• Two and Twenty Shops
• investment management firms having a contract
  that gives them a 2 of assets annual management
  fee and 20 percent carried interest

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DUE DILIGENCE AND ACTIVE INVESTING VC Fund
Management

• Deal flow
• flow of business plans and term sheets involved
  in the venture capital investing process
• Due diligence (in venture investing context)
• process of ascertaining the viability of a
  business plan

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VC Screening - Venture Characteristics

• Management
• Fire Within
• Business Model
• Business Plan
• Deal Structure
• Exit Plan

• Proprietary
• Growth
• Founder Commitment
• Experience
• Track Record

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Screening Outcomes

• 1. Seek lead investor position
• 2. Seek a non-lead investor position
• 3. Refer venture to more appropriate financial
  market participants
• 4. SLOR (standard letter of rejection) the
  venture

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Structuring a VC or Angel Investment

• Term Sheet
• summary of the investment terms and conditions
  accompanying an investment
• Typical Issues Addressed in a Term Sheet
• Valuation
• Ongoing funding needs
• Size and staging of financing
• Preemptive rights on new issues
• Commitments for future financing rounds and
• performance conditions
• Form of security or investment
• Redemption rights and responsibilities

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Structuring (contd)

• Typical Issues Addressed in a Term Sheet
• Dividend structure (Number of VCs and outsiders)
• Additional management
• Board appointments
• Conversion value protection
• Registration rights
• Exit conditions and strategy
• IPO-dictated events (e.g. conversion)
• Co-sale rights (with founders)
• Lock-up provisions

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Structuring (contd)

• Typical Issues Addressed in a Term Sheet
• Employment contracts
• Incentive options
• Founder employment conditions compensation,
  benefits, duties, firing conditions, repurchase
  of stock o termination, term of agreement,
  post-employment activities and competition
• Founder stock vesting
• Confidentiality agreements and protection for
  intellectual property

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Exit Strategies

• Acquisition -- least costly of exit strategies
• Public Offering -- most costly, but exciting and
  maintain some control
• Joint Venture -- intermediate strategy
• Equity Buyback -- expensive, but way to get
  venture capitalists out of business

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Summary - Advantages and Disadvantages
of Equity Funding

• Contractual Commitments
• Legal and paperwork
• Marketing and Management Assistance
• Leverage for debt financing
• Networking for additional funds and contacts

• Equity
• Oversight
• Control
• Over payment for funds
• Need to have exit strategy