Venture Capital: Istruzioni per l’uso (Come funziona e in che modo può aiutare una stratup)

Introduction to venture capital

Venture Capital is a small part of Private Equity

Venture Capital (€4.9bn, 2011)

• Cashin to finance growth
• Minority shareholders next to the entrepreneur
• Highly innovative industries
• Young companies, losing money with ambitious plans
• Pure equity risk
• Expected return above 10x over 5-­7 years time horizon

Private Equity (LBO,capdev) (€34.9bn, 2011)

• Cashout to buy shares from existing shareholders
• Majority shareholder with usually new management team
• Traditional industries
• Consolidated and profitable companies
• Structured finance = lever is one of the key
• Expected return 2­‐3x over 3-­5 years time horizon

Size of the European VC market (volume of investment)

Impact on the real economy of VC investing

A recent survey on a selected number of VC-­‐backed french companies in the digital industry has proved that:

• VC investing generates employment growth (not true for the rest of the economy!!) and better quality (full time vs temporary contracts) than SMEs on average
• VC backed companies hire younger people on average (31 years) and almost 13% of hirings are straight out of college
• VC backed companies invest more in R&D (2 Emes average SME) and are more internationally oriented (40% of turnover)

Venture Capital champions

Europe

USA

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How does VC investing work?

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Venture Capitalist investment game

Our golden rules (investment criteria)

1. The entrepreneur has to prove strong leadership, vision and passion
2. The market you are adressing has to be huge
3. Look at profitability!
4. The right team on board (need people to push, hire slow and fire fast)

How does a Venture Capital protects its minority position ?

VCs typically take a minority stake in the company. Standard protection tools in the industry are:

• Preferred versus ordinary shares
• Liquidation preference: participating and non-participating
• Anti-­dilution clauses: full ratchet or weighted average
• Corporate governance rules

How does a VC make sure that its targets are reached?

VC exit target is to be negotiated when the deal is closed

• Exit Emeframe

• Tag along

• Drag along

  Other standard characteristics of a VC deal:

• Internal investors partecipation

• Preferred dividends

• Rights in future rounds

• Rights of first refusal

• Information rights

• Management salary and commitment

How an early stage fund makes money

• 20 deals:

• 1 Blockbuster, 20x=80 M

• 1 star, 10x =40 M

• 2 successes, 5x=2x20M=40 M

• 4 average, 2­‐3X =4x10M=40 M

• 6 bad investments:0,5-­2x= 20 M

• 6 write offs

• Total : 220 M, net IRR to investors 12%, carried interest 20‐25 M (for 12 years’ worth of work)

• On any given investment, 10x must be possible

• In a successful fund, fund managers make less money than successful entrepreneurs, which is normal, similar to average entrepreneur

• NB: FCPI/ISF funds are different  

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What is the real average holding time in Europe (1)? venture5.png

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How to raise VC money

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How to approach a Venture capital fund

• Tell us who you are (management team CV and track record)
• Tell us what you want to do (value proposition to customer) and how (we can be your beta testers!)
• Sizing of the market
• Is there any IP protection envisageable
• Ambitious but credible financials with validated hypothesis
• Financial need and existig cap table

Few tips prior to your meeting

• Short &clear (make your investor deck short & clear)
• Get challenged (train yourself)
• Qualified endorsement (get opinion leaders on board since the beginning)
• Standard venture capital terms (be familiar with the VC legal jargon)
• Pick the right VC firm and the right person to talk to
• Feedback & next steps (ask for feedback and next steps at the end of your meeting)

Common myths

• NDAs

• Avoid DCF & IRR estimates