VC firms and other investors
There are a total of 7 different types of VC firms in additional to angel investors:
private independent venture capital partnerships
private small business investment companies
public venture capital companies
venture capital subsidiaries of large corporations
state venture capital funds
university related incubators & private sector incubators
investment banking firms
Private independent VC partnership
Limited partnership: tax benefits
10 years life, 2 year extension
Two types of PIP:
wealthy families-venrock associates,
institutional investors -- KPCB,
two types of funds: usually $2-5 million
traditional vc funds- investing in seed, or startups
turnaround or LBOs
VC firms and VC funds
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VC limited partnership
LP
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VC firms and VC funds
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PC-2
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The agreement of PE partnership -1
Fund sizes, investment maximum and minimum.
Number of investors, GP contributions
takedown schedule: both GP and LP do not like to pay the committed capital immediately
first amount to be disbursed at closing: 10-33%, the dates of the subsequent payments may be set in the agreement.
The agreement of PE partnership -2
The control of LP:
if 51%+ LP agree can replace a GP
GP cannot invest in area beyond their expertise
no fault divorce
the control of GP:
if LP pay late, a late fee is charged
condition on LP’s share transfers
The agreement of PE partnership -3
Management of the fund
size on any one investment, prevent GP from attempting to salvage a poorly managed investment
GP cannot have any share before LP get back their original capital, GP share as a call option
percentage of the fund can be invested in one deal
limit GP’s attempt to leverage the fund, limit the debt to a percentage
limit GP to coinvest between funds. GP’s attempt to salvage the troubled investment
limit GP to re invest profits
The agreement of PE partnership -4
GP activities-- 5 restrictions
1. Restrict GP to invest personal fund into the firm, may pay more attention, may not like to pull out if necessary
2. Restrict on GP to sell their shares of the fund to others, reduce the incentive of the GP to monitor
3. Restrict on future fundraising until a % of fund invested: additional fund require additional attention of the GP
4. Restrict on GP for their other activities
5. Restrict on hiring new GP with less experiences
The agreement of PE partnership -5
Types of investment
limited size in any given investment class
cannot invest into public securities
cannot invest into other PE funds
cannot invest into areas with little expertise
restrictions on foreign investment
restrictions on LBO
SBICs
Created in 1958, licensed and regulated by SBA
invested companies, ie. Apple, federal express, intel, cray research, etc.
because of SBA, investment from SBIC is more restrictive than other VC
some of the SBIC invest as equity, others as debt
government provides loans three times of SBIC’s paid in capital
four times of it if they are MESBIC -- minority enterprise small business investment companies
Public venture capital companies
Some Big public vc firms called BDC -- business development companies
some are SBICs
because of they are public companies;
different tax treatment than other VC
have to concern their stock prices
publicly available information
Benefits to corp VC subsidiary-1
Derive attractive financial returns
develop technology licensees, manufacturing rights, supplier agreements
control supplier uncertainty
identify flourishing industries
spin off businesses
generate new products
learn the dynamics of a particular marketplace
gain exposure to new markets and technologies
Benefits to the corp vc subsidiary2
Product marketing rights:
small firms are often happy to have larger corp sell their products.
Acquisition candidates:
GE wanted to acquire a CAD/CAM co, but bit low, later, it acquired a similar co.
a window on technology
the most notable benefit that large corp invest in small firm is the window to gain new technological development
the last decade, the biggest 10 AUS electronics corp did this.
Benefits of corp vc to investee co
An established customer base
credibility with customers and suppliers
credibility with bankers and other financial sources
general assistance in managing the business
a merger partner
additional capital a flexible financing package
investing in its employees to start their own co.
sign a collaborative research contract
Problems in corp vc subsidiary
Contradictory inv goals of the vc and the present corp
unwillingness on the part of the vc to invest in 7-10 yrs.
Conflicts of interest and legal problems
inconsistent goals of the corp and the entrepreneur of the new co.
limited investment opportunities
the difficulty of acquiring the funded company
complication involved in obtaining tech from the funded company
differences between organizational requirement for the corp and the investment portfolio.
State venture capital funds
Originally from Massachusetts, (such as CDFC-- community development financial corporation) Connecticut, later other states
state funded to promote high tech, startups, and other socially beneficial projects
state government promote the programs by
private sources will get tax benefits
state money promotions
University related incubators
Incubators: provide low cost laboratory and office space, state-of-the-art technical expertise and equipment, administrative supports, computer and library facilities.
Contacts with the vc, bankers, government officials.
Sharing ideas and contact among entrepreneurs
1984, 40 incubators in the states, now about 400, especially in PA, IL, NY.
. University city science center in Philadelphia. Affiliated with 28 universities and colleges in PA. To house 100 small co in its I million squ ft space.
Investment banks and boutiques
Investment banks usually invest in large amounts
boutiques in a smaller scales: $1-10 million
commonly used arrangement in equity transactions is the so-called lehman formula -- 5-4-3-2-1:
5% for the first million dollars of capital raised, 4% of the next, and so on.
Ex. The fees for a $3 million deal would equal to $120,000
