Venture Capital

What Is Venture Capital?

• Venture capital is equity financing, where an

investment partner sits along side the
entrepreneur and assists in
strategically MANAGING RISK associated with
building high potential, fast growth and capital
efficient companies.
 Venture capital is NOT:
• - Rich people spreading money in outlandish
and risky ideas
• - Corporations seeking out ideas to steal and
build on their own
• - Highly structured financial transactions
• - Debt or buyout equity capital with majority
ownership
 Venture capitalists

• A venture capitalist is a person who makes

venture investments, and these venture
capitalists are expected to bring managerial
and technical expertise as well as capital to
their investments.
Three Types of Venture Capitalists

A good venture capitalist is a

thoughtful, experienced ally, who
sits along side the entrepreneur as
a partner and a mentor, knowing
full well that their fate is
intertwined. Most venture
capitalists fall into the following
three types — domain expert,
operator or networker. 
 1. Domain Expert
• is someone who’s deep into a certain field and
knows everything going on in this industry.
 2. Operator
• Sometimes called as a growth expert, is
someone who has a track record of growing
and scaling a company.
 3. Networker
• is someone who can make important intros to
domain experts, operators, or your next
investor.
 Venture Capital Fund
• Refers to a pooled investment vehicle (in the
United States, often an LP or LLC) that primarily
invests the financial capital of third-party investors
in enterprises that are too risky for the standard 
capital markets or bank loans.
• These funds are typically managed by a venture
capital firm, which often employs individuals with
technology backgrounds (scientists, researchers),
business training and/or deep industry experience.
The Venture Fund Structure
 Venture Fund
• is the main investment vehicle used for
venture investing.
• Each is structured as a limited partnership
governed by partnership agreement
covenants, of finite life (usually 7–10 years).
• It pays out profit sharing through carried
interest (about 20% of the fund’s returns).
 Management Company
• is the business of the fund. The management
company receives the management fee from
the fund (about 2%) and uses it to pay the
overhead related to operating the venture
firm, such as rent, salaries of employees, etc.
• It makes carried interest only after the Limited
Partners have been repaid.
 Limited Partners (LPs)
• is someone who commits capital to the
venture fund. LPs are mostly institutional
investors, such as pension funds, insurance
companies, endowments, foundations, family
offices, and high net worth individuals.
 General Partner (GP)
• is the venture capital partner of the
management company.
• GPs raise and manage venture funds, set and
make investment decisions, and help their
portfolio companies exit, because they have a
fiduciary responsibility to their Limited
Partners.
 Portfolio Companies (Startups)
• receive financing from the venture fund in
exchange for shares of preferred equity. 
• The fund can only realize gains if there is a
liquidity event (such as mergers and
acquisitions or IPOs) and these shares can be
converted to cash.
 Three Investment Funds Types

• 1. Focus on Stage (early, mid or late). Later stage

means large capital requirement and decreasing risk
and return. Most big funds have to go late stage
because of their fund size.
• 2. Focus on Geography. Some dedicated regional
funds focus on prevailing market dynamics, i.e. 500
Startups has the 500 Kimchi fund for South Korea.
• 3. Focus on Sector. Popular industry sectors include
med-tech (Incube Ventures), biotech, IT, greentech
(Nth Power, Tech Partners), etc.
 How Returns Are Generated

• 1. Share Purchase: A buyout of an investor’s position

via a new investor looking to buy ownership or the
company repurchasing stock.
• 2. Acquisition (M&A): Strategic acquisition by an
incumbent who is buying a differentiated technology,
a large customer base, a rockstar team, or some other
combinations. Google, Facebook, Yahoo, j2 Global and
Microsoft are among the top buyers in the tech space.
• 3. Initial Public Offerings (IPO): Large stand-alone
businesses with stable customer base, product
strategy and growth potential, i.e. True Car, Alibaba.
 Position Role
They run the Venture Capital firm and make the investment decisions on
General Partners or GPs behalf of the fund. GPs typically put in personal capital up to 1-2% of the
VC Fund size to show their commitment to the LPs.
Venture partners are expected to source potential investment
Venture partners opportunities ("bring in deals") and typically are compensated only for
those deals with which they are involved.

This is a mid-level investment professional position, and often considered

a "partner-track" position. Principals will have been promoted from a
Principal senior associate position or who have commensurate experience in
another field, such as investment banking, management consulting, or a
market of particular interest to the strategy of the venture capital firm.

This is typically the most junior apprentice position within a venture

capital firm. After a few successful years, an associate may move up to the
Associate "senior associate" position and potentially principal and beyond.
Associates will often have worked for 1–2 years in another field, such as 
investment banking or management consulting.

Entrepreneurs-in-residence (EIRs) are experts in a particular industry

sector (e.g., biotechnology or social media) and perform due diligence on
Entrepreneur-in-residence potential deals. EIRs are hired by venture capital firms temporarily (six to
18 months) and are expected to develop and pitch startup ideas to their
host firm, although neither party is bound to work with each other. Some
EIRs move on to executive positions within a portfolio company.
Compensation of Venture Capitalists
Payment Implementation

an annual payment made by the investors

in the fund to the fund's manager to pay
for the private equity firm's investment
Management fees operations.[32] In a typical venture capital
fund, the general partners receive an
annual management fee equal to up to
2% of the committed capital.

a share of the profits of the fund

(typically 20%), paid to the private equity
fund's management company as a
performance incentive. The remaining
80% of the profits are paid to the fund's
Carried interest investors[32] Strong limited partner
interest in top-tier venture firms has led
to a general trend toward terms more
favorable to the venture partnership, and
certain groups are able to command
carried interest of 25–30% on their funds.