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1、Origin of Venture Capital - 1It did not exist as a profession before WWIIAmerican Research & Development, the first VC firm, 1946, General George Doroit of HBS.1953, SBA, 1958, SBICoriginally, SBIC could get up to $300,000 government money for each $150,000 PE. Half of the money in subordinated debe
2、ntures, half in reduced int. loans.Other benefits taxes, losses.History of Venture Capital-2Successful story: SBIC invested in CEIR $900,000, 9months later, became 7 millionby 1961, 250 SBIC gone public1964, pick of 722 SBIC, 1967 only 250 left.1968, first time private VC SIBCARD invested in DEC, $7
3、0,000 in 1957, got 52.7 million in 1967.1974, DOW fell to 600, NASDAQ to 54.871969, capital gain tax up. VC down.1965-1980, avg vc return 25%History of Venture Capital - 3Sources: 1981, 23% pension, 23% families1977, 105 private VC, 66 Corp vc, 66 SBICtypically, expected return 50% for startups, 30-
4、40% for second stage, 25-30% for expansion stageIPO 1981, 448 co. 3.2 billion, 1983, 884 co. 12.9 billionthe supply and demand of VC: the delta factorseed, early stage, later stage, conventional1980s, small firms 322 innovations per million employees, big firms only 225.Sources of FundsAngels: 250,0
5、00 individuals investing $20-30 billion, $100,000 each investmentpension funds and ERISA prudent man Taxes: 1969, 49.5%, 1978, 28%, 1981, 20%1980, 25% of VC in seed and early stage projects, 1988, reduced to 12.5% Elements of VC investmentAmount and timing of the investmentforms of investment (conve
6、rtible, preferred)terms of investment (conversion price, liquidation preference, dividend rate, etc.)put and call rightsregistration rightsoptions poolsvesting schedule, employment contractsboard director representationFVP: backgroundThe existence of intermediaries b/w GP,LPAngels investing $2-30 bi
7、llionVenture Capital Partnershipswhy families would like this idea:tax benefits: 39% income tax, but 28% capital gain tax, 14% if invested into small business and long termfederal inheritance taxes, 50% on individuals $18 million assets. Gifts to children $1 million1992, 3% of the families with $1mi
8、llion net assets control 44% of US household financial assets Fox venture PartnersA $100 million fund: fund of fund conceptsources of fund: wealthy familieshave to commit at least $2 millionwhy vc like this idea:1. The LPs may be valuable information source2. Avoiding vc dependent too heavily on ins
9、titutional investors3. Less restrictive terms from families4. Want to involve in subsequent round of investmentsFox Venture PartnersFVP intended to invest $5 MM each in 20 funds35% well known funds40% specified by region or industry20% new funds5% international fundsthis is different from buyout fun
10、ds ($20 MM in minimum)1994, 100.4 billion in PE, $32 billion in VC, the rest: 5% mezzanine, 2% distressed debt purchase362 fund in PE, among them, 194 VCFVP: history of fund of fundGatekeepers managed $18 billion of PE funds, about 18% of the totalthey provide advisory services to some clientsthey s
11、erve as linkage between the VCs and the startupsproviding the first screening for the venture capital firms, charge a service feesFox Venture PartnersThe resistance from the wealthy families:1. Information asymmetries, the one who need the service may not appreciate it.2. Agency problems, family fin
12、ancial managers3. Lack of resources, not using a lead investor, limited resource to market the idea.4. Ineffective marketing. Not show their track records5. The structure of the proposed incentive scheme.The size of the proposed compensation. Fox Venture PartnersThe challenges that FVP faces:the edu
13、cational role: the FVP will teach the families about the fundspotential competitors are lots: on the concept of funds of fundssince families now hired their financial managers, the similar agency problems in the institutional investors appeared as wellYale University endowment originYale was establi
14、shed in 1701 by 10 Connecticut clergymen.The endowment started 1818, divinity school to offer theological instruction, several alumni made large gifts. Yale use the money on land and building, and to invest in corp, railroad bond, equitiesby 1899, the endowment reached $5millionYale U. endowment his
15、tory1930, yale endow held 42% in equity, other U had only 11%later 1930,then treasurer, Tighe decided to reduce equity %but stock market booming in 1950-60, end of 1960, the trustee wanted to increase the equity portion and to contract out the portfolio management to an outside advisorby bear market
16、: 1969-1979, yales endowment declined by 46%Yale investments office -1997David swensen: 15 employee officeinvestment philosophy: different from other U. David likes Keynes maxim: worldly wisdom teaches us that it is better for reputation to fail conventionally then to succeed unconentionally. But he
17、 is willing to take the risk of being different. Not following the crowd.David Swensen s philosophy-1Strongly believed in equity: whether public or privateequities are real stream of income , bands are a contractual sequence of nominal cash flow$1 invested in end of 1925 in corp stocks worth $1 by e
18、nd of 1996, but only $34 in T bonds , $14 in T billshold a diversified portfolio, risk can be reduced by diversification rather than time the marketDavid Swensen s philosophy-2Increasingly seek opportunities in less efficient markets: why?The difference b/w 25 and 75th percentiles:fixed income fund
19、mg: minimal common stock mg: 3% per annumprivate equity mg: 15% per annumto utilize outside managers for all but most routine or indexed investmentthe managers have the max autonomybut the selection process is long and carefulincentives: not by the size of the management but by the performanceFour C
20、haracteristics of new firmsthat affect their financing strategiesUncertainty - measure of the array of potential outcomes for a company or project. The wider the dispersion of the potential outcomes, the greater the uncertainty.Asymmetric information, the entrepreneur knows more about his companys p
21、rospects than investors, suppliers or strategic partners.If more important assets are intangible substantial variations in market conditions.Six activities of PE firmsThe firms financing:sources of financing: PE. Or public market.Forms of financing: equity or debt.Division of profits between the ent
22、repreneurs and investorsstrategic control of the firm:monitoring , a critical roleability to alter the nature of the assets and obtain greater financial flexibilityevaluation is the final and the most critical points for the entrepreneur and the investor.Xerox Technology Ventures1946, Haloid company
23、, a photography paper company. 1949, the first copy machine.1960s, Xerox forms xerox computer services, scientific data systems, palo alto research center, to enter into computer industry.mouse and laser printer were designed by Parc.Xerox Technology VenturesThe establishment of XTV was driven by tw
24、o events in 1988:the difficulty to spinoff the Parcplacepublication of the book “ fumbling the futurewe need a system to prevent technology from leaking out of the companytwo strategies:to litigate those to leave with new technology$300,000 law suit against IBM, a woman dating people from competing
25、firmto invest those leavedevelop venture funds internallyCorporate Ventures2 extremes of corporate venture subsidiariesInternal ventures:only looking at internal technologiesinsufficient compensations: Block and Omati research on 207 ventures in 42 fortune 1000 companieshigh turnover ratesdifficult
26、to terminate External ventures:all the innovation activitiesex. 3M. Designates at least 25% of its business come from products not in existence 5 years earlier.XTV: startup and implementation$30million fund to promote tech developed in Xerox“XTV is a hedge against repeating missteps of the past. by
27、Xerox chairman KearnsXTV is a corporate division, but Adams crafted an agreement with Xerox resembled the typical agreement between LP and GP.The preparation of the term sheet.XTV: the implementation 1Similar to PIPs: the goal of XTV is to max returns.Usual conflicts of goals between corp and intern
28、al VCstructure: 20% of carried intereststhe degree of autonomythe same time frame: 10 yearsgive up controls of the companies they investedafter several rounds, Xerox holds 20-50% of equity.XTV: the implementation 2XTV principals:1. Relationship with the corp, just like LP and GP2. leverage the assets of Xerox whenever possible.Do the traditional VC jobalso help the ventures whenever they can :1. Supplier chennels2,firms can use Xerox offices and facilitiescertificates as a xerox company or a xerox alliance company
