Topics Discussed: - What is Venture Capital - Overview of VC Funds  - VC Investment Process - VC Investing Strategies  - Other Investors  - VC Fundraising Materials - Resources

1. Introduction to
Venture Capital
Avidan Rudansky

2. What is Venture Capital?
“An asset class where funds make long-term equity investments in startup companies”
Asset Class: Venture Capital is a form of private equity (alternative investment) with lower correlation with
publicly-traded assets.
Long-Term: Unlike public assets, venture capitalists won’t see a return for about 5-10 years (especially in
today’s ecosystem – more companies are staying private longer). High-risk, high-reward.
Equity Investments: Venture capitalists purchase shares (i.e. a %) of private companies in exchange for capital.
An investment is a bet on a (huge) success – a VC is seeking a fundamentally big outcome. Non-majority.
Startup Companies: Private ventures that cannot raise traditional financing (i.e. bank loans, capital markets).
They face high uncertainty and have high rates of failure, but some have been deemed to have high growth
potential or which have demonstrated high growth - VCs want to identify and fund these startups.

3. Startup Financing Cycle

4. Overview of Venture
Capital Funds

5. Venture Capital Firm Personnel
“Without entrepreneurs there would be no startup ecosystem”
Venture Capitalists (VCs) – General Partners or Managing Directors: Most senior person in a VC firm. Typically
make final investment decisions and sit on the BODs of portfolio companies.
Principals: Junior deal professionals assisting companies in recruiting, operations, technology, sales, and
marketing but are not decision makers in the investment process.
Associates: Non-deal partners and work directly for one or more deal partners. They source deals, help with
due diligence on existing deals, and write investment memos about potential investments.
Analysts: Analysts are at the bottom of the ladder and are very junior people, usually recently graduated from
college. Play similar roles to associates.
Venture Partners and Entrepreneurs in Residence (EIR): Part-time members of a VC firm. They help the firm
with managing investments and provide introductions to new ones.

6. What is Venture Capital?
s

7. Venture Capital Fund Structure
A venture fund consists of many legal entities
The management company legal entity (i.e. Innovate Ventures Management LLC) to which the general
partners belong pays the salaries and expenses from the ~2% management fee the fund pays out annually
The general partners legal entity (i.e. Innovate Partners I GP) is the entity to which the general partners
contribute ~1-2% of the total fund size (to align interests, motives, and incentives) and receive the carry from
the fund.
Each fund (i.e. Innovate Ventures Fund I LP) is a separate entity with limited partners and makes individual
investment in startups (usually not investing in previous companies from new funds)
The fund investors or Limited Partners (LPs) are the entity that commits the majority (98%+) of the fund’s
capital – these funds go into the fund’s legal entity (i.e. Innovate Ventures Fund I LP) – and receive all their
money back (if that’s the case) before any of the general partners do. Then then rest of the profits are
distributed 80% to the LPs and 20% to the GPs.

8. Economics: How VCs Make Money
“2 and 20”
Management Fees: Charge a management fee (% of AUM) per year to cover the costs of
managing the capital (i.e. salaries, rent, utilities, travel etc.), independent of investment
success. Fee begins to decrease after the end of the “commitment period”.
Carried Interest or “Carry”: The share of the profit that a VC keeps after returning all the
capital to the LPs. Must clear the hurdle rate, a certain IRR or return (usually 7-8%) the
VC firm must deliver to the LPs before the GPs carry kicks in.
2%
20%

9. How VCs Make Money Example
A VC firms raises a $100M fund with a 10-year lifetime
• Management fee= (2%) x ($100M) = $2M (each year)
• Over 10 years: ($2M) x (10 years) = $20M
• Therefore there is pressure to continuously raise larger and larger funds – to increase
the total management fee
• The fund returns $2.1B (which is unlikely to happen for most funds)
• Total profit= ($2.1B) – ($100M – original fund size) = $2B
• The original $100M gets return to all the LPs first
• GPs get their 20% carry from the rest of the profits (i.e. $2B)
• (20%) x ($2B) = $200M – this is how much the GPs get

10. Venture Capital Mechanics
Commitment Period
• Typically 5 years
• Length of time to identify and invest in new
companies
• Allocate reserves to each investment for
“follow on” rounds
• This is why VCs raise a new fund every 3-5
years
Investment Period
• The time a fund remains active
• Typically 10 years (“a 10-year fund”)
• Extensions are allowed, but are limited
• Management of investments goes beyond
period:
1. Distribute private stock of these companies to LPS
2. The LPs pay more to keep the fund alive (in the
hope for these companies to return a multiple)
3. Sell to secondary market and close the fund

11. The lifeblood of a
Venture Capital
firm is deal flow

12. VC Investment Process
• Identification
(i.e. deal
sourcing)
• Terms (i.e.
term sheets) –
tons of legal
papers
• Investment
decision
Evaluation
Initial
Negotiation
Due Diligence
Final
Negotiation/
Decision
Supporting/
Monitoring
Sourcing
• Initial screening
• 2nd screening
(workshop – deeper
dive with more
members of the
team)
• Light due diligence
• Partner meeting
with investment
memo and thesis
(entrepreneur is
invited to present)
• Due diligence (in-
depth, rigorous
due diligence)
• Board service
• Assist
management
with sales,
marketing,
recruiting,
networking,
fundraising etc.
Out of 1,000 companies a partner ends up investing in 3 to 4 of them on a yearly basis. That’s only .2%
Fundraising Timeline ~6 Months

13. VC Fund Lifecycle
Raise
Capital
First 1-2
Call Capital
1-4
Generate
Deal Flow
First 3
Make
Investments
First 3-5
Monitor,
Support
Investments
Always
Follow-On
2-5, and
6-10
Sell,
Harvest
Investments
5-15
Recycle,
Return
Capital to
LPS
5-15
Get to
Carry
8-15
Rinse and
Repeat
3-5
YEARS

14. VC Full Picture
Raise Capital from Investors Generate Deal Flow
Closing of Fund
First Capital Call
Screen
Business
Plans
Evaluate and
Conduct Due
Diligence
Negotiate
Deals and
Staging
Additional
Capital Calls
Invest Funds
Value Creation and Monitoring
• Board service
• Performance evaluation and reviews
Harvesting Investment
IPO | LBO | M&A | Liquidation
Distributing Proceeds
Cash | Public Shares | Other
• Recruitment management
• Assists with external relationships and
fundraising
Year 0-1
Year 1-3
Year 4-8
Year 9-15

15. Venture Capital
Investing Strategies

16. Types of Venture Capital Firms
Micro VC Funds. Small venture firms with usually less than $15MM in total capital per fund. Almost exclusively
invest at the seed and early stages, often alongside other angels and VC firms. (e.g. Maccabee Ventures)
Seed-Stage Funds. Generally bigger than micro VCs and can scale up to $150MM per fund. They focus on being
the first institutional capital into a company and rarely invest in rounds past Series A. Often provide a
company’s first non-company board member.
Early-Stage Funds. Funds that are generally $100-300MM in size and invest from Seed-Series B. Often continue
to invest later in the life of the company.
Mid-Stage Funds. Funds that range from $200MM-1B in size and generally invest in Series B and later rounds.
Often called ”growth investors” and provide capital to grow and scale.
Late-Stage Funds. Invest in successful stand-alone businesses, typically doing its last financing before an IPO

17. VC Investments at Different Stages
Early-Stage
• Founder/team focused
• Ideation and product-
market-fit (PMF) risk
• Often own more of the
company
• Smaller investments with
potential for large returns
Mid-Stage
• Team/product focus
• Traction/scaling risk
(sales and marketing)
• Provide capital to
grow and scale
• “Pouring gas on the
fire”
Late-Stage
• Exit risk
• How big can the
market become
• IPO and acquisition
potential
• Mix of VCs, PE, and
public investors
(mutual funds)
VC Alphabet: Pre-Seed à Seed à Series A à Series B à Series C à Series D…

18. What VCs Look For
“Management, Management, Management”
TEAM: people/management that can get the job done
MARKET: a large, rapidly expanding market
PRODUCT: a brilliant, unique idea or technology that can be commercialized
BUSINESS MODEL: a well-prepared and focused business plan that provides clear direction
TRACTION: proof that there is customer demand behind a particular idea
DIFFERENTIATION: a strategy that has a strong, sustainable competitive advantage
VALUATION: a reasonable price per share
Also see Blumberg Capital’s 6 T’s

19. What entrepreneurs need to successfully articulate
to investors is how much money their company can
return to the VCs.
There must be a clear roadmap to a >10x return
because VCs will only have a handful of huge
successes out of every 10, 20, or 50 investments, and
those successes need to be large enough to provide
outsize returns (i.e. return the fund and then some).
VCs want to believe that every deal they make can
accomplish this.

20. Other Investors

21. Angel Investing
Angel Investors: Individuals who invest their own money into startups
• Usually the first money into a company and don’t often earn a large return (dilution)
• They are people who enjoy being in the ecosystem and helping companies grow
Characteristics of a successful Angel investor:
• Patient, even-tempered and risk tolerant
• Self-disciplined
• Learning Mindset and an ability to mentor
• Financial + Networking Guru
Benefits of Angel Groups/Syndicates:
• Pooled capital for more sizable angel investing
• Pooled deal flow – ability to see more opportunities that are more vetted
• Shared expertise and due diligence – different expertise and long verification process
• Better negotiations when you can deploy more capital into a company
• Governance – one angel (leader) with an active role for guidance on behalf of the group

22. Other Flavors of VC
Incubators. Places where multiple startups rent office space and have access to some shared or à la carte
services. These companies benefit from the symbiosis or energy of being around other startups and bumping
into investors, developers, and other relevant people.
Accelerators. Startup accelerators support early-stage companies through education, mentorship, and
financing. Accelerators usually invest a small amount $20k in exchange for a small amount of equity (6%) with
additional follow-on available ($100k). Startups enter accelerators for a fixed-period of time (~3 months), and
as part of a cohort of companies.
CVC. A venture firm that is sponsored and backed by a corporation, often but not always part of a publicly
traded company
Crowdfunding. When a group of individuals funds a company either through equity purchase, debt purchase,
pre-sale ordering of a product, or gifting of money (i.e. donation) – JOBS Act 2012

23. VC Fundraising and
Terms Documents

24. The Termsheet
Economics: refers to the return the
investors will ultimately get in a
liquidity event...and the terms that
have direct impact on this return.
(i.e. valuation, price or option pool)
Control: refers to the mechanisms
that allow the investors either to
affirmatively exercise control over the
business or to veto certain decisions
the company can make. (i.e. board
seats or protective provisions)
Termsheet: A non-binding summary document of key terms in contemplation of a financing

25. The Cap Table
The cap table summarizes who owns
what part of the company before and
after the financing and is almost
always included in a termsheet.
Key Elements:
• Pre- and post-money valuation
• Amount raised
• % Ownership
• Post-investment share total
• Option pool %
Cap Table: The spreadsheet that defines the economics of a deal

26. The Pitch Deck
Problem
What is the problem the
company is addressing and
why?
Vision
What is the future state you are
striving to realize?
Solution/Value Prop.
This slide should outline what
your company is doing and
how.
Market
Illustrate how big the market is.
TAM, SAM, SOM.
Team
Share the key members of the
team and their backgrounds.
Traction
These slides show how the
company is doing. Show
metrics.
Business Model
These slides show your GTM
and monetization strategy
Competition
Outline the players in your
market and explain why you
are different.
Ask
State how much are you raising
and what the goals are for the
financing.

27. Other Fundraising Materials
Elevator Pitch: A short description (few sentences/paragraphs) of an idea, product or company that
explains the concept in a way such that any listener can understand it in a short period of time.
Executive Summary: A 1-3 page description of your idea, product, team, and business. Should be
short, concise, and well-written.
Business Plan: Usually a 30-plus-page document that goes into great detail about a business’
market, product, target customer, go-to-market strategy, team, and financials.
Private Placement Memorandum (PPM): A traditional business plan wrapped in legal disclaimers
Financial Model: 100% of them are wrong. VCs focus on (1) assumptions of the underlying revenue
forecast and (2) the monthly burn rate or cash consumption
Demo: VCs learn a lot about a product/service from a demo and can connect emotionally with it.

28. Additional Resources
Books
• Venture Deals
• The Entrepreneurial Bible to Venture Capital
• Secrets of Sand Hill Road
• Grit
• Loonshots
• The Future is Faster Than You Think
Podcasts
• The Full Ratchet
• a16z Podcast
• This Week in Startups
• How I Built This
• Masters of Scale
Blogs/Newsletters
• a16z Newsletters
• AVC
• Both Sides of the Table
• Andrew Chen’s Essays
• Trends by The Hustle ($$)
• Pitchbook Blog
Miscellaneous
• Full list of the best books, blogs, and podcasts
• Venture Capital and Startup Glossary