Venture Capital

Venture Capital Professor Sandeep Dahiya Georgetown University

ONSET Ventures • How would you compare ONSET to a more traditional source of capital such as a Bank? (Would TallyUp care if the money came from a bank instead of a VC?)

What is a VC? (1) A VC is a financial intermediary, meaning that they take the investors’ capital and invest it directly in portfolio companies.

Angel Investor

(2) A VC will only invest in private companies. This means that once the investments are made, the companies cannot be immediately traded on a public exchange.

Mutual Fund

(3) A VC takes an active role in monitoring and helping the companies in his portfolio. (4) A VC’s primary goal is to maximize his financial return by exiting investments through a sale or an initial public offering (IPO).

Corporate Investment

(5) VCs invest in order to fund the internal growth of companies.

Buyout Fund

ONSET Ventures • How would you compare ONSET to a more traditional source of capital such as a Bank? (Would TallyUp care if the money came from a bank instead of a VC?)

• Guiding principles of ONSET – Do they make sense?

– Which type of entrepreneur is or is not a good fit for ONSET? Why? – Why is ONSET limiting itself to 80-95 million range when there is a strong demand from investor?

This Course • No easy answers – Boot Camp (Up to 100+pages of reading before class!!) • Main Perspective – Key aspects and practices of industry – How these key features are a response to the difficult environment – Constant comparison of the US and European experience

We will follow the “Venture Capital Cycle” Investing Capital

Fund raising

Exit and returning capital

6

Raising Capital • Highly complex and arcane legal issues • We shall focus on high level themes – Perspective of capital suppliers – Structure of rewards

• Profound effect on behavior is important for everyone!

ONSET Ventures • The first fund (1984) – Do you find anything unusual about this fund?

• Highlights from the Offering (Ex1) – If you were investing in ONSET III what would you focus on? Why?

Investing Capital • Challenges – Uncertainty – Asymmetric Information – Nature of Firm’s assets – Conditions of relevant financial and product markets

• Responses by VCs – – – –

Active Screening Stage Financing Syndication Use of Stock options/grants with strict vesting requirements – Contingent control mechanisms – Covenants and restrictions – Strategic composition of Board of Directors

ONSET Ventures • Revisit the guiding principles of ONSET – How are the applied/not applied to Tally Up investment? – Analyze Tally Up using the challenges/responses framework we just saw

Investing Capital • Challenges – Uncertainty – Asymmetric Information – Nature of Firm’s assets – Conditions of relevant financial and product markets

• Responses by VCs – – – –

Active Screening Stage Financing Syndication Use of Stock options/grants with strict vesting requirements – Contingent control mechanisms – Covenants and restrictions – Strategic composition of Board of Directors

Exiting Investments • Failure – Disappear – Zombie Companies “Living Dead”

• Success “Liquidity Event” – Critical … yet controversial – Can cause severe heartburns for an entrepreneur • IPO • Sale to another company

Why Take this Course? • There are few VC related employement opportunities? • Broader perspectives – Would be entrepreneurs – know the other side – Would be investors – know the incentives and organizational issues – Would be professionals (Bankers) – know the dynamics

Grading • Class Participation 20% • Home Work/Quiz 30% • Final Exam 50%