5523 Week 5 Slides.pdf - FINS5523 Alternative Asset Classes Lecture 5 VC Investing Investment Selection and Monitoring 1 Review and Outline How do VC

5523 Week 5 Slides.pdf - FINS5523 Alternative Asset Classes...

This preview shows page 1 - 12 out of 54 pages.

FINS5523 Alternative Asset Classes Lecture 5: VC Investing: Investment Selection and Monitoring 1
Image of page 1
Review and Outline How do VC funds ensure returns and minimize risk, agency problem, and adverse selection? Financing instruments (last week) residual control and liquidation rights anti-dilution protection Highly selective screening process Proactive and robust due-diligence Conservative valuation Monitoring and value adding services Staging and Syndication The “Term Sheet” 2
Image of page 2
How Do VCs Select Investments? 3
Image of page 3
VC Investment Decision Making Screening/Deal Sourcing (Strategy identification and Qualitative analysis) Due Diligence/ Deal Evaluation (Preliminary quantitative analysis, questionnaires, making inquiries, seeking expert opinions) Valuation and Risk Analysis (Detailed quantitative analysis) Deal Closing (Bargaining, Contracting, and Funding ) 4
Image of page 4
5 Conservative Valuation The idea: only a few companies in a VC portfolio need to deliver returns to make up for losses in the others VC price investee companies really cheaply relative to their value estimates Large discounts normally apply when comparing investee firms to similar listed firms VC therefore relies a lot on sensitivity analysis Valuation of an investee firm should be below the AVERAGE-case scenario Valuation increases as more information becomes available
Image of page 5
6 Quotes For the rest of the lecture, I will use quotes taken from interviews of seasoned Silicon Valley VCs to illustrate the theoretical concepts Risk and return “We need to make good venture multiples, say 5 to 10 times”. “The brave new world has more market risk but not necessarily more technical risk” “We lay out our investment hypothesis. We typically list 3 or 4 key risks we want to mitigate with the money going in”
Image of page 6
7 Quotes Valuation “Last year we did 2 investments that were 2 nd round financing. In both cases, they were in revenue and starting to ramp. We’re willing to pay a higher value for that . They should be of lower risk: the dogs were starting to eat the dog food. It was a question of how quickly they’d eat and how well the company would scale from an execution standpoint. In those cases if we made five times our money we’d probably be happy, but we’d also expect the success rate to be much higher.”
Image of page 7
8 Continuing with the survey results from Gompers, Gornall, Kaplan and Strebulaev (2019)
Image of page 8
9 Screening Process Top-down approach Analysing industries/markets, identifying opportunities/strategies and approaching firms Often used by late-stage, buyout and generic funds Bottom-up approach Inviting/screening proposals, narrowing down target firms, and building portfolios Often used by early-stage funds and funds with very deep technological focus
Image of page 9
10 To Fund or not to Fund The screening process often leads to outright rejection of funding
Image of page 10
Image of page 11
Image of page 12

You've reached the end of your free preview.

Want to read all 54 pages?

  • Three '14

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors