Transcript Capital Efficient

Venture Capital
Industry
Professor Dell – Spring 2011
Macro View - Total U.S. Capital Markets
Private Equity is just a sliver of total capital markets,
but it plays an important role in driving economy
For-Profit
Capital Market
by Segment
Total = $48.4 trillion
Equity Securities
31%
Private Equity = 2%
Public Debt
19%
Bank Deposits
12%
Private Debt
35%
LBO Funds
$740B
VC Funds
$260B
Macro View - Hugely Important to Economic Growth
As much as 18% of US GDP attributable to venture backed companies.
Macro View – Sector Concentration...Why?
IT is consistently over 50% of funds invested, but Healthcare has been growing in importance
after tech/dotcom frenzy of 2000 as Baby Boomers age
% Invested in Sectors of VC by Year
Total = 100%
Sector
$94.8B
$36.4B
$22.1B
$19.7B
$22.4B
$23.8B
$25.7B
2006 Median Deal Size
Information
Technology
$7.0mm
Healthcare
$8.0mm
Business/
Consumer/Retail
$5.7mm
Other
Source: VentureOne
2000
2001
2002
2003
2004
2005
2006
4
$7.5mm
Macro View
•
•
VCs invest in a limited number of sectors.
Most startups are not suited to be venture bets.
– Not capital efficient, no home run potential
– Other sources: credit cards / debt / friends and family $ / Small Business Investment
Corporation (SBIC) & Small Business Administration (SBA) loans.
•
•
•
New Market = no incumbent, so a new entrant can capture the prize.
Massive Market = lots of room for winners and wiggle room.
Capital Efficient = doesn’t take a lot to get the business off the ground.
J Curve
Portfolio Theory of VC
Number of Successful Companies in a Cycle
$100mm Fund, 20 bets, 2 big wins….up to $15mm in any given company
Diversified
investments
within IT:
Total
Write-off
0x-1x
Get a
little
more
than our
$ back,
but not
worth the
effort
2x-4x
Return Multiple Expectation
Home
Runs
5x-10x
Security
Storage
Networking
Social Media
Retail.com
Mobile
Advertising
Portfolio Theory of VC:
20 bets:
2
18
HOME RUNS
WHATEVERS
Of the 20 bets that a VC firm will make, in a normal distribution of
returns (and considering the risks), 2 companies will generate the
vast majority of the returns.
But you never know which 2 they will be, so every investment has
to have home run potential & be capital efficient.
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Number of Successful Companies in a Cycle
1995-2000 Portfolio Outlook
Crazy Time
Total
Write-off
0x-1x
Get a
little
more
than our
$ back,
but not
worth the
effort
2x-4x
Return Multiple Expectation
Home
Runs
Everybody
jumps into VC
(hedge funds,
private equity
funds, grandpas)
Drive prices up
Drive returns
down
5x-10x
Macro View
• Most VC Firms Loose Money
• Yet a few great firms make all the $
– Kleiner, Sequoia, Benchmark, Accel
• Impossible to Time the Market
– Market Conditions
• Public Markets
• Customer’s willingness to buy / good vs. bad economy
• If you build real value (regardless of market timing), you’ll probably make
money.
Portfolio Management – Fail Fast / Focus on Winners
With limited capital, and the knowledge that the odds are stacked
against success, a VC needs to know which companies are the
“winners”…what do you do?
Kill the losers. Get them to “fail fast”
Be objective about which companies you continue to fund.
Focus on the “winners”
Every company that is not CF+ is on it’s way to going out of
business..
Skills of Top VCPE Investors
Skill/Experience
Personal
Networks
Selectivity &
Specialization
Management
Experience
Description
Strong personal networks enable investors to generate dealflow, be the first to
learn about industry developments, help portfolio companies secure talent, and
provide critical business development introductions.
With large pipeline of deals and limited time and resources, must efficiently sift
through potential investment opportunities. Critical to leverage technical
knowledge and to prioritize opportunities based on anticipated return. Each
Partner in a firm generally actively manages only around 5-10 investments at a
time, depending on lifecycle, so must choose wisely.
Investor generally sits on Board and serves as close advisor to CEO and
management team. When company faces tough decisions (e.g., firing vs. making
payroll in a down quarter), it is helpful for investor to be able to draw on personal
experience and serve as advisor.
Industry
Knowledge
Important for investor to know lay of the land—key competitors, industry
developments, technical specifications—to make informed decision about making
investment, as well as how to manage development and exit.
Focus on
Value Creation
Unlike public companies, ownership and management are generally aligned
because of shared economic interests, focused on an exit. It is in investor’s best
interest to remain involved and watchful, guiding strategic decisions to create
value.
..and ;)
–
–
–
–
–
Salesmanship
Credibility / Integrity
Tolerance for Risk
Pattern Recognition
Curious…Looking for the next Big Thing
It’s a Small Club: Ex. PayPal
PayPal was a highly successful start-up founded in 1998 and sold in 2002 to eBay for $1.5B. The founders and
top management have gone on to significant success and remain interconnected:
Max Levchin
Co-founder
Peter Thiel
Co-founder
Founded web
property:
Started hedge fund,
Clarium, & vc firm,
Founders Capital.
Personally invested
in:
Involved with:
Invested in:
Roelof Botha
CFO
Jeremy Stoppelman
VP Engineering
Joined top VC firm
Sequoia Capital in
2003
Co-founded successful
internet site yelp in
2004
Advised:
Invested in
YouTube in 2005—
sold to Google for
$1.6B
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Sources: Wikipedia, Sequoia Capital, PayPal, Facebook, LinkedIn, Slide, Thank You for Smoking, YouTube
Russel Simmons
Engineer