How do Venture Capital firms work and how does the money flow. A brief overview.

1. This presentation is made possible by the support of the American People through the United States Agency
for International Development (USAID). The contents of this presentation are the sole responsibility of Rick
Rasmussen and do not necessarily reflect the views of USAID or the United States Government.
VC Business Model

2. Sources of Venture (Risk) Capital
• Friends, Family and Fools
• Angels
• Angel Groups
• Venture Capitalists
– Publicly Traded Funds
– Privately Formed Funds
• The Venture Capital Limited Partnership
• Corporations (Strategic Investors)
– Corporate Investor
– Corporate Captive Venture Fund
• IPO and The Public Markets

3. Venture Capital Fund Structure
Venture Partners
Associates
CFO and Administration
General Partners
CORPORATE
PENSION
FUNDS
UNIVERSITIES
WEALTHY
INDIVIDUALS
& FAMILIES
$$ $
Limited
Partners
Potential
Funding question
Invest
m e n t
Invest
m e n t
Invest
m e n t
Invest
m e n t
Invest
m e n t
Invest
m e n t
Invest
m e n t
Each Fund is a
stand-alone entity
VC firm may have multiple
overlapping funds

4. VC Business Model
• Funding comes from Limited Partners (LPs)
– Pension funds, large family trusts, sovereign funds…
– Each fund lasts 7-10 years
– Committed money, collected upon a “cap call”
• Fund is managed by General Partners (GPs)
• Fund finds and invests in companies
• Profits returned to LPs as companies exit
– Merger, acquisition,
– Initial public offering (IPO)
– Directorships, additional shares, etc.

5. General Partners
• Organize the Fund
• Raise money from Limited Partners
• Find deals and make investments
• Monitor Investments
– Sit on boards
– Help build each business
• Secure Liquidity (Exits)

6. The VC Business Model
Biotech
Big Data
Mobile
App
VC firm LP
LP expecting
greater than S&P
average over
fund life
Management fee
~2% per year
+
Carry
~20% on any exits
• VC will invest in 10 to 50 companies in one fund
• Each partner may do 4 to 8 investments over life of
each fund
LP
Investments

7. VC Places Multiple Bets
Biotech
Big Data
Mobile
SW
VC firm LP
Invest $50M
(Money sent as
investments made)
$3M
series A
$8M
series B
$10M
series A
40%
18%
25%
LP

8. Typical Scenario (out of 10 companies)
One Skyrockets
Great returns – hopefully 10x
This makes the fund successful
3 do well
Moderate returns, at least returning
investment
3 trolls
Continue to do business without an
exit, sucking up bandwidth to manage
3 die
But that’s OK, much was learned

9. Outcome is Known
VC
Firm
Biotech
Big Data
Mobile
SW
LP
Invest $50M
(Money sent as
investments made)
$3M
series A
$8M
series B
$10M
series A
Shut
down!
Series C,
then IPO at
$500M
Acquired
for $200M
LP

10. Fund Winds Down
Biotech
Big Data
Mobile
App
VC firm LP
Invest $50M
(Money sent as
investments made)
$3M
series A
$8M
series B
$10M
series A
Shut
down!
Series C,
then IPO at
$500M
Acquired
for $200M
40%
18%
25%
$0
$45M (18% became
9% due to series C)
$50M
LP

11. Exit Math
• LP committed $50M but cap calls for $21M
• Over 10 year period paid $10M in management fees
• LP math:
– Capital recovered $95M
– LP got $8M (biotech) + $10M (big data) = $18M
– Portion of carry
• 80% of ($50M-$10M)= 0.8 x $40M = $32M
• 80% of ($45M - $8M) = 0.8 x $37M = $29.6M
• LP: $31M out, $79.6M returned (net = $48.6M)
• VC: $10M in fees + $15.4M in carry

12. Tough to get a huge win…