Venture Capital in tech
Theory and Practice
Venture Capital in tech
Theory and Practice
Technical
Theory
Practice
What is a Venture Capital company
General Partners (GP)
manage
10-years Investment Fund
Investment Fund
Investment Fund
Limited Partners
(LP)
Startup
Invest money in
Get funding from
Uni endowment
Pension funds
Hedge funds
Money managers
Charity endowment
Software
Pharma
Nuclear
Space
...
VC
Funding Round
Invest money in
Wait 10 years
Help
Liquidation event
Get money with markup
Return a profit
Pre-Seed
Seed
Serie A
Serie B
...
Acquisition
IPO
Resale on the private market
Bankruptcy
Hopefully
The Plan
Incentives
How do you make sure GPs do a good job ?
How do you make sure LPs pick you ?
Investment Thesis
- Model of the world of startup
- What to invest in
- Specialisation
- How to help them grow
- What are the best moment to invest
- ...
Story for Investors
20 and 2
- 20% of the total profit
- "Carry"
- At the end of the fund (10 years)
- "Success fee"
- 2% yearly of the fund value
- Based on marked-to-market value
- "Management fee"
Investment Thesis in theory
Really generic, but shared by a lot in Silicon Valley (SV)
General Partners (GP)
manage
10-years Investment Fund
Limited Partners
(LP)
Startup
Invest money in
Invest money in
Uni endowment
Pension funds
Hedge funds
Money managers
Charity endowment
Software
Pharma
Nuclear
Space
...
How a tech startup work
- Capital Heavy
- Profitable because able to touch a lot of people
- So you need to scale
- Network effect
- Winner-take-all
- First entrant moat
- So you need to scale faster than any competitor
- Growing cost money
- no profit until you switch to stopping growth
Lot of Failure
But lot of profit if succesful!
How return work
- Need approx 12% return per year
- Inflation
- beat market index (approx 7%)
- Fees!
- Translate to need to be 3x over 10 years
- If high failure rate, need the success to be big!
In practice ?
Can become profitable
Return better than market index
Lot of failure!
Lot of failure ?
YES
Around 80% at least bankrupt
Can beat the market ?
NO
Can become profitable ?
Noone care
IPO and acquisition with no idea of profit being possible
- Uber
- PagerDuty
- NewRelic
- NPM
- Github
- Tell me one that did profit
- ...
Can become profitable ?
Ever Growing size of Investment Rounds
What is happening ?
20 and 2
- 20% of the total profit
- 0 as the return is low
- Bad, money in 10 years.
- I want to buy a house now as a GP
- 2% yearly of the fund value
- Based on marked-to-market value
- Wait a minute...
- Based on marked-to-market value
Funding Round
Invest money in
Wait 10 years
Help
Liquidation event
Get money with markup
Return a profit
Pre-Seed
Seed
Serie A
Serie B
...
Acquisition
IPO
Resale on the private market
Bankruptcy
Hopefully
The Plan
Seed
Serie A
Serie B
The Plan from the GP point of view
...
Grow at X%/month
100 shares at 100USD
1USD per share
100 shares at 200USD
2USD per share
Seed shares went from 1 USD to 2 USD
2cents per share yearly became 4 cents
100 shares at 400USD
4USD per share
Seed shares went from 1 USD to 4 USD
2 cents per share yearly became 8 cents
A shares went from 2 USD to 4 USD
4 cents per share yearly became 8 cents
...
Grow at 2X%/month
...
Seed
Serie A
The Plan from the LP point of view
Grow at X%/month
100 shares at 100USD
1USD per share
100 shares at 200USD
2USD per share
Seed shares went from 1 USD to 2 USD
- Big Rate of Return
- 2X in a year !
- Let's invest more now in this VC !
Final thought
I don't know mate
Understand how the system work
GROWTH! GROWTH! GROWTH!
I don't know mate
Understand how the system work
GROWTH! GROWTH! GROWTH!
Venture Capital in tech
Theory and Practice
Venture Capital and Software
By di4nao
