BUSI 701
Artistic Entrepreneurship
Venture Capital Primer
Vernon’s Razor
©2006 Patrick Vernon
Venture Capital
• Part of Private Equity
• Private: Anything not public
• Equity: ownership
Vernon’s Razor
©2006 Patrick Vernon
VCs Job
1.
2.
3.
4.
5.
Raise a pool of money
Find growth companies
Invest for equity
Help build companies
Exit (and return capital to investors)
Vernon’s Razor
©2006 Patrick Vernon
The Wall Street Organization, Inc.
Vernon’s Razor
©2006 Patrick Vernon
Vernon’s Razor
©2006 Patrick Vernon
Stages of Equity Funding
$500,000 - $50M
$100,000 - $500,000
$25,000-$250,000
$1,000-$50,000
Friends/Family
Seed or
Pre-Seed
Angel or
Early Stage
VC Rounds
1, 2, 3… or A, B, C…
(Institutional)
IPO
Vernon’s Razor
©2006 Patrick Vernon
Where Does the Money Come From?
• 60’s and 70’s from high net worth
individuals
• Today, institutions and corporations
– UNC $1B endowment
– CalPERS $ 1 Trillion ($29B alternative assets)
• PE/VC is often called “Alternative Assets”
Vernon’s Razor
©2006 Patrick Vernon
LPs and GPs
Portfolio
Startup
LP
LP
Startup
Startup
VC Firm
(LLC w/GPs)
Startup
LP
Startup
Startup
Vernon’s Razor
©2006 Patrick Vernon
How do VCs Make Money?
• Management fee (~2% to cover expenses)
• Exit = Liquidity event
– Acquisition
– IPO
• Sell shares for $$
– Return % of $$ to LPs
– Keep % for LLC (“carry”)
Vernon’s Razor
©2006 Patrick Vernon
Startup
LP
LP
Startup
Startup
VC Firm
(LLC w/GPs)
Startup
LP
Startup
Startup
Vernon’s Razor
©2006 Patrick Vernon
Exit
bomb
LP
bomb
bomb
LP
VC Firm
(LLC w/GPs)
Single
Double
LP
Home
Run
Vernon’s Razor
©2006 Patrick Vernon
Venture Vocabulary
• Pre-Money Valuation: the value of the venture
before any VC $$ is invested. This number is
negotiated and driven by the market, i.e., if
multiple VCs want to invest, the price goes up
(like a bidding war).
• Post-Money Valuation: the value after the
investment is made.
• Term Sheet: the legal document describing the
deal.
Vernon’s Razor
©2006 Patrick Vernon
Simple Venture Math
• Pre-money + Investment = Post-money
• % ownership = Investment ÷ post
• ROI is often stated as “x” return
Vernon’s Razor
©2006 Patrick Vernon
Practical Uses for You
• It is a possible creative way to raise money:
steal this model and sell “equity” in your
venture (to friends, family, fans, etc.).
• It will require you to choose a pre-money
valuation and assign % ownership.
• Problem: what does % ownership mean?
Vernon’s Razor
©2006 Patrick Vernon
VC and Entertainment
• “Hit” driven
• Work with highly creative people
• Job is to balance creativity/risk aversion (high
incentives for winning formulas)
• Mitigate risk with portfolio
• Job is to say no 99.9% of time
• Control the tap
• Networks add value
Vernon’s Razor
©2006 Patrick Vernon