Have you been following the growing trend in continuity funds?
Listen to our 30-minute session with OurCrowd Investment Partner David Stark to learn how professional investors use preemptive rights to get further involved in winning companies.
• Get an insider’s view of how to leverage preemptive rights in startup investing
• Understand the basics of continuity funds and review case studies
• Learn how to get involved at a time when companies are staying private longer
Preemptive Rights: An Important VC Investing Right
1. 1
Grab your seat at the table
What you need to know about preemptive rights
David Stark
Investment Partner
Presented by:
2. Legal Disclaimer
The information contained in this presentation is provided solely for informational purposes and does
not constitute an offer or solicitation of investment in any OurCrowd limited partnership. Anything
contained in this presentation should not be construed as creating a presumption by you or
OurCrowd that you are an accredited investor. The offer to invest in any OurCrowd limited
partnership related to any company can only be made on the OurCrowd website and only to
investors who have been fully qualified as accredited investors in accordance with the laws and
regulations of their respective jurisdictions. OurCrowd makes no representation or warranty, express
or implied, with respect to any data provided to you regarding any information provided by the
companies on its web site or in this presentation, and will not be liable in any way to you or to any
other person for any inaccuracy, error or omission of any company data.
Please be aware that investments in early stage companies contains a high level of risk and you
should consider this prior to making any investment decisions
3. Educational Webinar Series
Previous Educational Webinars:
1. The Changing Relationship Between Investors and Investments
2. How High-Net-Worth Investors Stay Ahead
3. Conquering the Term Sheet: Everything you need to know about deal
terms (3-part webinar series)
4. Cashing in: How to make money investing in startups
5. From Ideas to Assets: Common Investor Pitfalls with Intellectual
Property and How to Avoid Them
4. Agenda
Two important topics:
1. The most important principle in venture
investing: Power Laws
1. The most important right in venture
investing: Preemptive (aka Pro Rata) Rights
5. The exponential arc of success
“Successful businesses tend to have an exponential arc to them. Maybe they
grow at 50% a year and it compounds for a number of years. It could be more
or less dramatic than that. But that model — some substantial period of
exponential growth — is the core of any successful tech company. And during
that exponential period, valuations tend to go up exponentially.”
– Peter Thiel (PayPal and Palantir founder, angel investor in Facebook)
“Exceptional performance … attracts new resources as well as rewards that
facilitate continued high performance [repeat].”
– Robert Merton (sociologist)
6. VC Returns Follow a Power Law Curve
• Bulk of returns are generated by a
small percentage of investments:
“80/20 Rule”
• According to Horsley Bridge, a
longtime limited partner in vc funds,
about ~6% of their hundreds of vc
investments since 1985 generated
~60% of the total returns.
“The task of a venture capitalist is to
experiment on a trial and error basis in order to
discover success from within a portfolio.” –
Tren Griffin (Microsoft)
8. Fred Wilson:
“Early stage investing is a lot like poker.”
• If your hand is getting stronger,
you increase the betting,
putting more money at risk in
each subsequent round. That’s
how smart poker players win
and its also how smart VCs win. Fred’s Poker Analogy blog can be found in full here.
9. This is why the preemptive (aka pro rata) right is
the most important right in venture capital.
Definition: A preemptive right is the right of a shareholder to maintain a
current share of the ownership of a company by purchasing a proportionate
share of any new stock issues.
Implication: Preemptive rights protect an investor’s ability to continue
betting on the winning hands within the portfolio.
Who gets them: All shareholders or “Major Investors”?
Suggested reading: Mark Suster’s Authoritative Guide to Prorata Rights
10. Preemptive example: AirCnC
Example:
• Investor A owns 10% of a startup called AirCnC
• AirCnC is doing really well and is approached by Investor B to lead a
subsequent $10M financing round
• Thanks to preemptive rights, Investor A has the right to invest an
additional $1M (and maintain a 10% stake) in AirCnC
Preemptive rights are not just a right, they are an asset.
11. …which is more valuable now than ever since
companies are raising more money prior to exit…
Source: Dow Jones VentureSource and SEC filings via WilmerHale
12. …and all of the value capture is occurring while
companies are still private.
Source: Andreesen Horowitz
13. …and all of the value capture is occurring while
companies are still private.
14. The Opportunity Fund Trend
”Every venture firm wants to invest in the handful of companies that
generates the highest return. They compete vigorously for the chance
to invest in these companies. Some compete on the basis of their
brand. Some offer to pay the highest price. Others suggest they can
bring strategic value, or that they have unique insight using a data-
driven approach. Yet those who pioneered opportunity funds
recognize that, while everyone competes to invest in the best
companies, there is a better way to get access to these very best
companies – and that is to already be an existing investor.”
– John Backus (National Venture Capital Association)
15. Case Study #1:
USV’s Opportunity Fund ($135M)
Fund Name Vintage IRR
Union Square Ventures 2004 Fund 2004 67.20%
Union Square Ventures 2008 Fund 2008 28.30%
Opportunity Fund 2010 2010 62.52%
Union Square Ventures 2011 Fund 2011 41.80%
Opportunity Fund 2014* 2014 3.75%
Union Square Ventures 2014 Fund* 2014 -19.83%
“At USV, we recognized the importance of pro
rata early on but did not know what to do about
it. So we let our pro-rata rights go unused in Zynga
and Twitter because we did not have the funds to
take those allocations... (The Opportunity Fund) will
allow us to continue to invest in our most
established and successful companies,”
- Fred Wilson, USV
Source: Pitchbook April 2016
*IRR of 2014 Funds likely reflects J-curve of all young funds.
16. Case Study #2:
Foundry Group Select Fund ($225M)
“The Foundry Group Select Fund will invest solely in our Foundry
Group and previous funds’ portfolio companies that have
achieved significant success… Up until this point, we’ve been
limited in the amount we can invest in these rounds due to our
early-stage strategy.”
- Brad Feld, Foundry Group
Fund Name Vintage IRR
Foundry Venture Capital 2010
Annex 2015 -0.29%
Foundry Group Select 2013 99.65%
Foundry Venture Capital 2013 2013 25.12%
Foundry Venture Capital 2010 2010 15.26%
Foundry Venture Capital 2007 2007 52.47%
Source: Pitchbook April 2016
17. “We're going to do our pro
rata investment for every
YC company in every round
with a valuation below $300
million...”
- Sam Altman, YC
Case Study #3:
Y Combinator Continuity Fund ($700M)
18. “We have a lot of really attractive later stage companies with
pro-rata rights to invest.”
- Danna Settle, Greycroft Partners
Case Study #4:
Greycroft Growth Fund ($200M)
“Our most successful companies have all gone on to raise growth
financings… The ability to have dry powder to support our best
companies is a valuable asset for those entrepreneurs.”
- Ian Sigalow, Greycroft Partners
21. OC2 is designed to provide OC investors a vehicle
for capitalizing on these opportunities.
• Dedicated fund that leverages our preemptive rights to provide our
investors access to our most promising companies.
• Automated investing process, only investing in follow-on, up-rounds with
institutional lead investors.
• First access to capture unexercised preemptives or to take additional
allocations after existing investors.
• Democratizing the Opportunity Fund strategy
• Visit www.ourcrowd.com for more
Peter Thiel: “If you back-test Founders Fund’s portfolios, one heuristic that’s worked shockingly well is that you should always
exercise your pro rata participation rights whenever a smart VC was leading a portfolio company’s up round.”