Lecture Notes: Venture Capital Introduction

Overview

• Speaker: Dr. Adam Jay Bach
• Topics Covered: Venture Capital, Angels and VCs, VC model, capitalization example

Angels vs. Venture Capital Funds

Angels

• Individual investors using personal funds
• Decisions often based on emotions or gut instinct
• Investment oversight varies: some active, some passive
• Simpler documentation and deal terms

Venture Capital Firms

• Managed funds, raising money from sources like wealthy individuals, corporations, etc.
• Standardized investment process
• Legal responsibilities, requiring active oversight
• Complex investment documents

Angel Networks

• Group of angels making investments together
• Screening committee and joint investments
• Special-purpose entity like LLC for investments
• Examples: Wisconsin Investment Partners

Finding Angel Investors

• Start within personal network, as angels remain low-profile
• Events and organizations can help make connections
• Service providers (e.g., attorneys, accountants) can be links
• Requires extensive legwork and networking

Venture Capital as an Asset Class

• High-risk, high-return investment
• Suitable for a diversified portfolio
• Startup companies offer potential for higher returns
• Exit events: sale to a strategic buyer or IPO (rare)

Venture Capital Fund Structure

• Funds raised from limited partners
• General partners manage and take a fee
• Compensation: typically 2% management fee, 20% of profits
• Significant influence on GDP and job growth

VC Investment Process

• Introduction, initial review, and presentations
• Challenging due diligence and negotiation process
• Factors: market familiarity, team strength, proprietary protection, market growth, competition

VC Funding Considerations

• VC interest through referrals
• Need for an attractive exit strategy
• Alignment with VC's fund strategy (industry, geography, investment size, fund life)

Key Takeaways

• Angels and venture capitalists differ in approach and structure
• Understanding the investment process and networking is crucial
• VC funds have significant economic impact but are selective in investments

Next Steps

• Next lecture will cover a capitalization example to illustrate processes further