Materials

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What is Venture Capital?

Investing in early-stage businesses.

Industry Terms

VC

Venture Capital

SaaS

Software as a Service

B2B

Business to Business

DTC

Direct to Consumer

Cap Table

Capitalization Table (who owns what of  a company)

Unicorn

Companies worth over $1B

ESOP

Employee stock option pool (how much  have we allocated of the company to give to employees?)

Pivot

Changing direction of the business  strategy

Term Sheet

Document guiding how the company’s  round and investor relationship will be

GMV, MRR, ARR

Gross Merchandise Value, Monthly  Recurring Revenue, Annual Recurring Revenue

CAC, LTV

Customer Acquisition Cost, Lifetime  Value

Startup Funding Options

1. Bootstrap (personal capital) -- No dilution + fastest cash in bank
2. Angel investors, friends + family (Usually little dilution, decent time to cash in bank)
3. Grants + loan (No dilution, may have covenants, personally liable on loans)
4. Venture Capital (Most dilution, highest value add, slowest time to cash in bank)

Venture Capital

1.Investinginto startups or early stage companies

2.Riskyas f**k (most startups fail)

3.Commercializedin Silicon Valley (Apple, Cisco, Atari) (Sequoia, Kleiner Perkins)

4.Minorityownership positions in companies (>25% typically) per round

5.Rangesacross early to late stage investing (companies worth $1M to $1B+)

It's a relationships business.

More important than what you know, it’s who you know.

Building relationships with founders before you invest in them is crucial.

Venture investments are like a marriage – you’re in it for the long run so you better know who you’re getting involved with!!!

Try to provide value to others before you ever expect anything in return.

The most important advice: be nice to everyone, and be open minded.

Startup Paths

1.Youcould be a Tesla (which is totally fine)

•Nice business, family style, consistent cash flows

•May get turned down on market size or lack of IP from VC’s most likely

•Small market, good product, okay team

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2.Or,you could be a f**king Rocketship

•Venture scale business, potential to become a huge company

•Huge market + perfect market timing + customers willing to spend

•Solid must-have product, growth through network effects, huge following

•Amazing team, and can execute well

Types of VC Funds

1.Angel Groups (MIT Alumni Angels, GTAN)

2.Micro VC Funds (Weekend Fund, Work Life Ventures)

3.Traditional VC Funds (Andreesen Horowitz, Sequoia)

4.Late Stage / Growth Funds (Softbank Vision Fund)

5.Corporate Venture Funds (Salesforce Ventures)

How Funds Differentiate

• Domain / industry expertise
• Operational guidance
• Customer and industry relationships
• VC network (to help raise the next rounds)
• Experience with scaling other companies as investors
• Services (accounting, finance, taxes, legal, marketing)
• Founder mentor network (other CEO’s, CTO’s, COO’s, CRO’s)

Valuations

Basics

• Pre-money valuation
• Cash in (amount raised)
• Post money valuation (Pre-money + cash in)

Example

• Startup wants to raise $1M
• VC gives them a $4M pre-money valuation
• Post-money valuation is $5M
• Dilution on the round is 20% (1M/5M)

How VCs determine check size

• Stage (seed vs series b)
• Ownership targets (2% vs 15%)
• Fund size ($10m vs $100m)
• Thesis (spray + pray vs concentrated portfolio)

Check Size Example 1

• Seed Stage Fund, $10M, Spray + Pray Portfolio (50-75 companies), Target 2%
• Avg Size of Round = $2M, Avg Post Money = $10M
• Target Ownership = 2%, Need to buy that much…
• Check Size = 2% of $10M  $200K

How VC Returns Work

Let’s say the average VC exit is $100 million.

If you own 1 percent of the company at the time of exit, that may be a great multiple on investment but the $1 million in proceeds won’t move the dial on a $50 million fund.

If you own 15 percent, however, it does move the dial on a $50 million fund because you are returning $15M from the original investment.

Each investment must have the ability to “return the fund”, known as an RTFE (return the fund exit)

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