The Business of Venture Capital Book Chapter 1 Summary

Institutional investors or limited partners (LPs) look for the following:

• Performance track record and background of fund managers
• Investment strategy and its relevance to (a) managers’ expertise and (b) market conditions

LPs comprise of:

• pension funds
• endowments
• foundations
• corporations
• private family offices
• individuals
• Fifty‐two percent of venture funds complete their fund‐raising in 12 months. Others spend as much as 24 to 36 months on the road.
• Of the funds that successfully got off the ground, only 7 percent are first‐time funds.
• About 70 percent of the funds successfully reach or exceed their targeted fund amount.

Entrepreneur — venture capitalists have to pitch a thousand pitches to institutional investors to raise their fund and execute a predetermined plan.

RAISE THE VENTURE FUND

• VCs raise money from financial institutions
• Investment professionals or general partners (GPs) develop an investment strategy

FIND THE RIGHT INVESTMENT OPPORTUNITIES

A venture fund has to build a portfolio of companies that promise strong returns. Each portfolio company should demonstrate the potential to generate a return that equals a multiple of 8 to 10 times the capital invested.

A venture firm may have multiple funds e.g. Hackathon Entertainment Ventures (Firm), Hackathon Entertainment Early Stage Fund 1, Hackathon Entertainment Early Stage Fund 2

GENERATE FINANCIAL RETURNS

• Fund returns, measured by internal rate of return (IRR) are a function of two factors: time and capital
• The faster a portfolio company is sold, for as high an amount, the higher the IRR.
• Almost 80 percent of all investments fail
• Time is not your friend: The longer a start‐up takes to reach a critical value milestone, the more concerned investors become.
• VCs are nurturing a company that they ultimately plan to sell to the highest bidder
• A venture capitalist makes money in two ways: a base salary and a percentage of the profits (called “carry” or “carried interest”).
• Most funds are structured so that the profits are distributed after they have covered all the previous losses in the fund.

ROLES AND RESPONSIBILITIES

• General partners (GPs, managing directors or managing GPs) — negotiating terms for investment opportunities, participating in boards of current portfolio companies, responding to any LP/investor requests, and putting out a few fires
• Vice presidents
• Principals
• Associates
• Analysts — Source investment opportunities and screen these for further deliberations
• Venture partner and entrepreneur‐in‐residence positions — Source investments that fit within the fund’s investment strategy or offer sector expertise to assist other partners in making decisions

COMPENSATION

• VCs are compensated by two methods: (1) management fees and (b) share of profits called carried interests or carry.
• Investors pay an annual management fee, typically 2 to 2.5 percent of the committed capital per year
• Investors also keep 80 percent of the profits, and the fund managers take home 20 percent