1. About Venture Capital
December 2012
Hervé Lebret

2. Stanford ecorner
Venture Capital Is a Time Bomb
David Heinemeier Hansson | 37signals
How do venture capitalists decide what to invest in, and why?
Steve Jurvetson

3. Some introductory numbers
VC USA UK CH Sweden India France China Total
Kleiner Perkins 16 16
Sequoia 12 12
NEA 7 1 8
Benchmark 7 1 8
IVP 7 1 8
Accel 6 6
Greylock 5 5
Oak 3 1 1 5
Venrock 5 5
Index Ventures 2 1 2 5
Mayfield 5 5
Sofinnova 1 3 4
Mohr Davidow 4 4
Atlas 1 1 2 4
USVP 4 4
Innovacom 4 4
3i 2 1 3
Bechtolsheim 3 3
TVI 3 3
Crosslink 2 1 3
MPAE 3 3
DFJ 1 1 1 3
Redpoint 3 3
Harbor Vest 1 2 3
Union Square 3 3
… …
Total 147 10 3 10 3 24 2 199
Extracted from data in http://www.startup-book.com/2011/08/15/more-data-on-ipo-and-founders

4. Agenda
 Historical background
 Economic perspective
 The VC process

5. History of venture capital
 Full story in:
 You can also read chapter 4
Start-Up, what we may still learn from Silicon Valley

6. It began as a hobby of the rich…
Laurence Rockfeller was
interested in science and
technology and less in his
family business. He assembled
a team of advisers, backed
many entrepreneurs. In 1969,
he structured a $7.5M fund into
Venrock Associates.
Founded as the one of the first He invested in MinuteMaid,
private equity firms in 1946 by Memorex, Genera Signals but
"Jock" Whitney, J.H. Whitney & also in movies (Gone with the
Co. provided capital and Wind)
professional assistance to He coined the term “venture
entrepreneurs. capital”.

7. The Ancestors’ investments
Arthur Rock, a banker on the East Coast, is contacted to
help them raising $1.5M; an amount he will find in the
person of Sherman Fairchild, the largest individual
shareholder of IBM and owner of Fairchild Camera. In
1957, Fairchild Semiconductor is founded.
Fairchild Semiconductor was very successful and reached
12,000 employees but the founders were bought back their
shares by Fairchild… they still became wealthy. Faichild
bought back for $2.4M the stake of the 8 founders.
ARD financed High Voltage (a $1.8M return for a $200k
investment) and Digital Equipment in 1957 (a $70k inv.
worth $355M after 14 years).
ARD stopped in 1972. ARD biggest flaw was no incentive
for associates (no carried interest).

8. A genealogy

9. Kleiner Perkins first fund
$7M fund with $4M from Hilman (Wilmington), $1M from
Rockefeller University. Both Kleiner and Perkins put $150k
each. Tandem ($152M)
KP First Fund (1972-1984) Genentech ($47M)
$16'000'000
$14'000'000
$12'000'000
Cost ($)
$10'000'000
$8'000'000
$6'000'000
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$2'000'000 June
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More on http://www.startup-book.com/2009/02/09/about-kleiner-perkins-first-fund-episode-3

10. Agenda
 Historical background
 Economic perspective
 The VC process

11. Nasdaq and the VCs
1971-2006
4'500 90
4'000 80
3'500 70
1974: the oil crisis and ERISA act
3'000 60
2'500 50
1984: the HDD crisis
2'000 40
1'500 30 1990: US recession and
1'000 20 declining IRRs
500 10
0 0
2001: the Internet crash
1971 1976 1981 1986 1991 1996 2001
Natural scale Nasdaq ( end y ear) VC f unds ( $B) 10'000 100
1'000 10
100 1
10 0. 1
1 0. 01
1971 1976 1981 1986 1991 1996 2001
Source: Compilation HL Log scale Nasdaq ( end y ear) VC f unds ( $B)

12. Some returns
Although the data are not so easy to obtain (the numbers below are not fully
consistent…), the VC world has generated exceptional returns. The individual
success stories are known. Some previous slides give some more numbers. The
reader can compare to the typical Wall Street numbers…

13. Geography of venture capital

14. How do VC make money?
Today VCs manage funds of other financing institutions
and usually not their own (this is BAs or syndicates of
Bas).
A typical VC fund lasts 10 years with an investment
period of 5-7 years
VCs have two sources of funding:
 A management fee: usually 2% to 2.5% of the size of
the fund per year
 A carried interest: usually 20% of the fund net profits
 Possibly a hurdle rate (6-8%)

15. Agenda
 Historical background
 Economic perspective
 The VC process
You can read chapter 5
Start-Up, what we may still learn from Silicon Valley

16. What do VCs look for?
“Some winning venture capitalists claim to look
almost exclusively at the backgrounds and
personalities of the founders; others focus mostly
on the technology involved and the market
opportunity the venture addresses”
from The New Venturers, Wilson (1984)
 “There are people risks, markets risks,
product development risks and finance
risks. We will not invest in a company
unless we understand and are comfortable
with three of these risks.”
 “The components of success are product
differentiation, a fast-growing market, a
team of dedicated people and money.”
Don Valentine quoted in Wilson (1984)

17. The main terms of an investment
 The size of the investment and related valuation.
 The pre- and post-money valuations differ by the size of the investment.
The ESOP size also has an impact and the fully diluted valuation includes the
newly avalables stock options.
 The price per share and the number of shares created.
 The class of shares, usually preferred.
 The structure of the board of directors.
 The vesting and reverse vesting mechanism of the stock options and
founders’ shares.
 The kind of liquidation preference.
 The anti-dilution mechanism.
 The redemption rights.
 The priority rights, the restrictions on the sales and the transfer of shares.
 The exit conditions, and in particular the clauses that may force a sale
(tag along, drag along).
 The expenses linked to the investment.
 The kind of decisions that investors control after their investment, usually
through veto rights (the protective provisions).

18. $0
$200'000'000
$300'000'000
$400'000'000
$100'000'000
$500'000'000
$600'000'000
$0
$11'000'000
$22'000'000
$33'000'000
$44'000'000
$55'000'000
$66'000'000
$77'000'000
$88'000'000
$99'000'000
$110'000'000
Series C
Series B
Series A
$121'000'000
Common
$132'000'000
$143'000'000
$154'000'000
$165'000'000
$176'000'000
$187'000'000
$198'000'000
Liquidation preference
$209'000'000
$220'000'000
$231'000'000
$242'000'000
$253'000'000
$264'000'000
$275'000'000
$286'000'000
$297'000'000
$308'000'000
$319'000'000
$330'000'000
$341'000'000
$352'000'000
$363'000'000
$374'000'000
$385'000'000
$396'000'000
$407'000'000
$418'000'000
$429'000'000
$440'000'000
$451'000'000
$462'000'000
$473'000'000
$484'000'000
$495'000'000
$506'000'000
$517'000'000
$528'000'000
$539'000'000
$550'000'000
$561'000'000
$572'000'000
$583'000'000
$594'000'000

19. Anti-dilution
Investors protect their shares in case of a “down-round”, i.e. a new
financing round with a lower price per share.
There are three mechanisms (see excel-file):
Full ratchet
Weighted narrow-based average
Weighted broad-average
The full ratchet gives the new (lower) price to the previous preferred shareholders who receive new shares.
A weighted average is a combination of old and new price.
The narrow-based weighted average takes into account only the total number of outstanding preferred
shares for determining the new weighted average price for the old shares.
The broad-based weighted average accounts for all equity previously issued and currently undergoing issue.
1st round 2nd round
Price $2.00 $0.75
Amount $6'000’000 $750’000
Anti- Broad-based Narrow-based Full ratchet
dilution Shares % Shares % Shares % Shares %
Common 10'000’000 76.9% 10'000’000 70.7% 10'000’000 68.8% 10'000’000 52.6%
Series A 3’000’000 23.1% 3'140’187 22.2% 3'555’556 24.4% 8'000’000 42.1%
Series B 1'000’000 7.1% 1'000’000 6.9% 1'000’000 5.3%
Total 13'000’000 14'140’187 14'555’556 19'000’000

20. Comments on terms
A term sheet follows the technical due diligence (3-6 months) and is
conditional to legal and accounting due diligence. If all is positive, an
investment should follow in 1-3 months.
Terms are seldom balanced and reflect investors’ power. There is a “no-
prisoner” approach!
 There are however standard with not much deviation
 Confidentiality/exclusivity/costs are the only binding terms
 Avoid milestones!
 Be prepared…

21. If you want to be part of the game…
Career Traits for the Aspiring Venture Capitalist
Steve Jurvetson