This document provides an overview of venture capital funding. It discusses how VC funds make money through management fees and carried interest. It covers key deal terms like pre-money valuation, option pools, liquidation preferences, and board composition. The document also examines negotiations between founders and VCs. It explores exit strategies like IPOs and acquisitions. The overall content aims to help founders navigate relationships with VCs and understand the mechanics of raising institutional funding.
4. Entreprneurship Lecturer at Stanford
ETL.Stanford.EDu
Ravi Belani: Former VC, Stanford Lecturer, Alchemist Director
6 Years as a Venture Capitalist
Skype, Baidu, Hotmail, Tesla
Me: Twitch (Amazon), Pubmatic
Director, Alchemist: B2B-Focused Accelerator
AlchemistAccelerator.com
5. Alchemist: The Leading Enterprise
Accelerator
PLATINUM
Top US Accelerator of 2016 by MIT / Rice Seed
Accelerator Rankings
#1
CB Inisghts labeled Alchemist as the #1 Accelerator based on
Alumni Fundraising
(YC was #2, Techstars #3)
12 Alchemist companies have been acquired in the last two years.
PAGE 03
60%
Over 60% of Alchemist companies raise institutional capital within
12 months of Demo Day (35 companies to date, average raise is
$2.1 million).
12. Management Fee Consumers 25% of a FundHow much management fee does a VC make in this fund?
$500M Fund
13. Management Fee Consumers 25% of a FundManagement Fee Can Consume 25% of Fund Principal
$500M Fund $125M Mgmt Fee
• 2.5% Per Year For
10 Years
• Fund Committed
after 3-4 Years
• 3 Funds Drawing
Management Fee
Down on in any
given year
15. Case Study of a Young Fund:
Kleiner Perkins I (1972)
15
Fund Size
$7.5M
# of Co’s
17 @
Check Size
$450K
Return
$345M
46x
#
How much carry did the partners get?
16. VC Profit Share: Carry Calculation
16
Fund Returns: $345M
- Fund Size: $ 7.5M
-----------------------------------
Fund Profit $337.5M
X Carry 20%
-----------------------------------
Carry $67.5M
17. Of Kleiner Perkins’ 17 Investments, 2
were responsible for 90% of returns
17
18. VC’s want to return 1/3 of their fund with each investment
$500M Fund
# of Co’s
30
#
Big Winners
1 out of 10
%
x =
3 Big
Winners
in Each
Portfolio
19. Can Make Money Several Ways: Two Case Studies
Google: Rising Star
Hotmail: Contrarian Bet
23. Valuations are a function of
fundraising dynamics NOT instrinsics
Driven by the ownership needs of the funds you raise from and
the cash needs of the company
Post–Money Valuation = Cash Needs of the
Company / Ownership Needs of the Fund
Pre-Money Valuation = Post-Money – Cash Raised
Larger Funds are Much More Sensitive about Ownership Needs than Cash
Needs!
Series A : Raising off of the IDEA
Series B: Raising off of RESULTS
Trick is balancing the Series A valuation to set you up so you can raise off of
Results in the Series B at a markup (ideally 3x!)
24. What’s the post? What’s the pre?
• $2M given for 25% of the company
• $3M given for 25% of the company
• $2M given for 20% of the company
• $1M given for 40% of the company
Post–Money Valuation =
Cash Needs of the
Company / Ownership
Needs of the Fund
Pre–Money =
Post-Money – Cash
Invested
27. NEGOTIATIONS 101: DOES A ZOPA EXIST?
BATNA: Best Alternative to a Negotiated Agreement
ZOPA: Zone of Possible Agreement
Alternative to Sell: $1 Alternative to Buy: $8
28. Capture Value: How do you know how big the ZOPA is?
Alternative to Sell: $1 Alternative to Buy: $8
ZOPA
29. Negotiations Generate Value in 2 Phases
Create Value: Focus on Interests, Not
Positions
Capture Value: Understand the
Other Person’s BATNA first
37. VALUATION IS JUST ONE TERM
Pre-Money Valuation
Option Pool
Liquidation Preferences
Board Structure
38. Employee Pool
• Employee Pools typically come out of the PRE-MONEY – that is YOUR
Total Dilution is the NEW INVESTOR’s money PLUS the Employee Pool
• Can always expand the employee pool later – and when you do, all will
be diluted equally. Try to minimize the employee pool to what’s
absolutely needed.
• Exercise: You own 40% of a company. A VC wants to put in $2m for 25%
of your company, and requires a 20% employee pool PRE-MONEY.
• What’s the Post-Money Valuation?
• What percent of the company do you own afterwards?
39. VALUATION IS JUST ONE TERM
Pre-Money Valuation
Option Pool
Liquidation Preferences
Board Structure
40. Board Composition & CEO Role
How many, and what’s the split between preferred, common, and independents?
When is the independent important?
How do you fire a board member?
41. VALUATION IS JUST ONE TERM
Pre-Money Valuation
Option Pool
Liquidation Preferences
Board Structure
42. Liquidation Preferences
Why does Preferred Exist?
Check for:
• Multiples?
• Participating vs Non- participating
• Senior or Pari-Passu
What’s this?
43. Liquidation Preferences
Why does Preferred Exist?
Check for:
• Multiples?
• Participating vs Non- participating
• Senior or Pari-Passu
What’s this?