Lecture at the Founder Institute, Paris, France
1 February 2011
http://founderinstitute.com
(cc) BY NC SA, Rodrigo SEPÚLVEDA SCHULZ
http://www.rodrigosepulveda.com
18. how much money? key take-aways
✤ careful financial planning is necessary
✤ tells you exactly how much money is required
✤ (adjust for uncertainty with analytical tools)
✤ forces the entrepreneur to test his hypothesis and business logic
✤ gives before-hand many of the answers to investor questions
✤ Allows for scenario building (high, low, target)
32. example of an exit price
(2x revenues, after 4-5 years)
(fully diluted)
33. valuation take-aways
✤ 1st round (seed and/or series A)
✤ not a real life valuation, it’s only about how much you want to give away for the
amount of money you need > implied valuation
✤ minimize dilution by raising in tranches
✤ 2nd round (series B)
✤ you need to prove execution to raise at a higher valuation
✤ raise enough to reach cash-flow positive status
✤ 3rd round+ : growth (organic or acquisition)
34. specific clauses affect capital-gains
more than valuation...
✤ liquid preferences
✤ participating or not
✤ multiple or not
✤ http://privateequityblogger.com/2007/06/liquid-preference.html
✤ ratchet
✤ http://www.startupcompanylawyer.com/2007/08/04/what-is-
full-ratchet-anti-dilution-protection
41. LPs = Limited
Partners put money in
$
10 years
GPs = General Partners = the VCs :
‘manage the money’ =
they invest over 4-5 years
42. LPs = Limited money has to be returned to LPs
Partners put money in with an IRR
= Internal Rate of Return
$
$
10 years
GPs = General Partners = the VCs :
‘manage the money’ =
they invest over 4-5 years
43. LPs = Limited money has to be returned to LPs
Partners put money in with an IRR
= Internal Rate of Return
$
$
10 years
GPs = General Partners = the VCs : Only 50-60% is invested in
‘manage the money’ = NewCos,
they invest over 4-5 years rest kept as “dry powder”
44. ✤ there are usually investment rules:
✤ ex: only 5% of a fund in a company
✤ ex: no cross-fund in a single company
✤ which means for ex. 100*5%= 5m MAX in the life of the company from your VC !
✤ it also means 20 companies max/fund
✤ with 4 investors, investing over 5 years, that’s 1 new company / investor per year !
✤ statistically 60% of companies fail, 30% do just OK, 10% do great...
45. understand why there is a liquidity
clause after 5 years !
startup : 5y with VC
10 year fund
investment period
46. understand the age of the fund
startup : 5y with VC
10 year fund
investment period
47. understand the age of the fund
startup : 5y with VC
10 year fund
investment period
49. how LPs make money
1) hurdle rate ~15%, c. 4x (gross) required...
50. how LPs make money
1) hurdle rate ~15%, c. 4x (gross) required...
100m * (1+15%)^10 = 400m
51. how LPs make money
1) hurdle rate ~15%, c. 4x (gross) required...
100m * (1+15%)^10 = 400m
2) carried interest : any upside above the
hurdle rate is shared :
80% for LPs, 20% for GPs
52. how LPs make money
1) hurdle rate ~15%, c. 4x (gross) required...
100m * (1+15%)^10 = 400m
2) carried interest : any upside above the
hurdle rate is shared :
80% for LPs, 20% for GPs
there are subtleties: hurdle rate or not,
on invested money or not,
% might change if you are a great fund, etc.
55. how GPs make money
1) management fees ~1,5-2,5% of fund/year
56. how GPs make money
1) management fees ~1,5-2,5% of fund/year
100m * 2% = 2m/year.
means 2m * 10y = only $80m left to invest
57. how GPs make money
1) management fees ~1,5-2,5% of fund/year
100m * 2% = 2m/year.
means 2m * 10y = only $80m left to invest
2) carried interest : any upside above the
hurdle rate is shared :
80% for LPs, 20% for GPs
58. how GPs make money
1) management fees ~1,5-2,5% of fund/year
100m * 2% = 2m/year.
means 2m * 10y = only $80m left to invest
2) carried interest : any upside above the
hurdle rate is shared :
80% for LPs, 20% for GPs
there are subtleties: % on invested money or not,
% might change if you are a great fund, etc.
60. Why VCs raise more than 1 fund
management fees add up,
before making money on capital gains
Fund I
Fund II
Fund III
they need however to show success
before raising a new fund
61. understand you are competing for the same
cash with a different risk/ return profile
startup : 5y with VC high risk / high return
startup : 5y with VC low risk / medium return
startup : 5y with VC medium risk / medium return
10 year fund
investment period
62. understand you are competing for the same
cash with a different risk/ return profile
startup : 5y with VC high risk / high return
startup : 5y with VC low risk / medium return
startup : 5y with VC medium risk / medium return
10 year fund
investment period
63. understand you are competing for the same
cash with a different risk/ return profile
startup : 5y with VC high risk / high return
startup : 5y with VC low risk / medium return
startup : 5y with VC medium risk / medium return
10 year fund
investment period
64. VCs key take-aways
✤ understand why there are liquidity clauses
✤ understand the “age” of the fund : money for you or not
✤ understand “dry powder” for subsequent rounds
✤ understand that you are one of many startups. What matters is the
performance of the fund
✤ understand VCs make money only if you do really great (in the top
10%) after paying for the hurdle rate and 80% carried interest...
66. it’s all about minimizing risk first
✤ Execution risk => team
✤ Opportunity risk => market size, market traction
✤ Business model risk => business plan
✤ Technology risk => prototype, launched site
✤ All the rest => business plan, reference calls, due diligence
✤ The only thing left should be the market risk (competition, growth)