Essay About Venture Capital And Risk Mitigation

Venture Capital: Data & Thoughts (felipe Mendozaof Aristos Ventures)
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WEEK 2: THE PROCESS OF INVESTMENTVENTURE CAPITAL: DATA & THOUGHTS (FELIPE MENDOZAOF ARISTOS VENTURES)What is private equity?Investment classesTraditionalCashBondsEquitiesReal estateWhat is venture capital?Private equityLeveraged buyoutsGrowth capitalDistressed investmentsMezzanine capitalVenture capital Venture capital partnerships VCs funded 2340 new companies in 2016What you want to get acrossWhat’s the concept? Who is the customer? Who’s money are you displacing?What’s the big problem (or opportunity) and how do you solve it? What does the product help the customer do? What’s next (product vs. company building)?What’s progress to date? Is there transaction and proof it works?Who’s the team and what are their past successes?Sources/uses of the raise and how much Analogies helpThe first thing an investor hears is the last thing he remembers. Tell them what you do in the first sentence. Simplify the ‘technology’. Investors can be techies or finance peopleKISS (keep it simple, stupid); minimize buzz wordsShow your enthusiasm and excitement. You’re selling the company/idea/team. Know the audience and match the pitch to them. Address the pain points or predictable surprises Talk about risk mitigation: development risk, marketing risk, etc. Your product must be substantially better than incumbent to mitigate customer risk of buying from youAsk for the money you need and what you will do with itVENTURE CAPITAL DEAL SOURCING AND SCREENINGVenture capitalists (VCs) invest in privately held, high-growth, early-stage companiesTypically partnerships, run by general partners who raise money to invest from limited partners who are usually institutional investors Firms generally raise new funds every 3-4 years The modern venture capital industry began in Silicon Valley in the late 1950s with the founding of computer, medical, and technology-based start-ups THE PROCESS OF INVESTMENT: A MATTER OF TRUST AND MUTUAL INTEREST PRELIMINARY ANALYSISInvestor success depends on finding the right opportunitiesDeveloping Trust between Investor and Entrepreneur/Management[pic 1]Project fits our mandateManagement credibleBasis to work with managementAttractive industryAttractive marketBusiness model [pic 2]DUE DILIGENCE PHASE 1ManagementMarketCompetitorsPositioningCustomers VALUATIONWhat are the possible exits?IPOM&AAttractive market valuesVALUATION INFLUENCERS FOR EARLY STAGE Overall riskSignificant market sizeManageable competitionFundamental sustainable differentiatorTop-tier management team VALUATION AND RISK[pic 3]CAPITAL EFFICIENCY AND RISK[pic 4]METHODS OF VALUATIONMethodsDiscounted cash flow (DCF)ComparablesTarget ownershipReality for early-stage companiesPROS AND CONS OF DCFProsHighly quantitativeProvides specific, objective numbers as basis for negotiationSpeaks to ‘intrinsic value’ of companyCons Too many variablesDepends upon accurate forecastingDifficult to discount for risk and lack of liquidityCOMPARABLESMost closely resembles real estate valuationLook at prices of similar dealsStage of businessLocation of businessIndustry Adjust up or down for specific circumstances NEGOTIATING Important considerationsPrioritiesEquilibriumCommon basis for valuationPreliminary valuation Exclusive STRUCTURINGForm of entityC corpLLCCapital structureEconomic termsControl terms DUE DILIGENCE PHASE 2: THE DEEP DIVETRANSACTION-PROCESS DOCUMENTATIONPreliminary Investment Overview/ThesisSingle page document-high level overviewRelays first opinion back to partnersInvestment Due Diligence Package/NotebookDocuments, interviews, observationsInvestment Memorandum7-10 page document that summarizes due diligence, market, management, product, proposed financing, milestones, etcInvestment recommendationTerm SheetMONITORING AND EXIT-PORTFOLIO MANAGEMENT