Basics of Venture Capital

Explore how venture capital firms make money by charging about 2% management fees on assets under management and roughly 20% carried interest on profits, incentivizing performance.

Institutional investors, including pension funds and endowments, and fund managers invest around 15-20 percent of venture capital funds, alongside individuals and family offices reinvesting and advising companies.

Outline the fundraising process for venture capital, showing how startups submit a business plan with an executive summary, opportunity, market size, and competitive analysis, plus founders, management, and stock considerations.

Founders present their business idea and five-year plans in an introductory meeting, while investors ask questions to decide the next step toward funding or pitching to fund partners.

Prepare for the due diligence phase by detailing your product, customer base, and business strategies, plus plans to scale your pitch deck, marketing, team, and budget.

After due diligence, a non-binding term sheet outlines basic investment terms negotiable by both parties. Complete legal documents and funds available by the venture capital fund advance the fundraising process.

Learn why startups seek venture capital over bank loans, since banks avoid early-stage funding and VCs evaluate startups with broader metrics like market size and computer analysis.

Venture capital relies on high-risk, unlimited upside from equity returns. Firms evaluate startups with metrics beyond balance sheets, aiming for product-market fit, market size, and the potential of reinvestment.

Founders trade equity for funding, risking loss of upside and control as VC firms gain a stake and board influence, while aiming to grow value for the fund.

Discover how venture capital firms are categorized into industry-specific funds, corporate venture arms like Accenture Ventures and IBM Ventures, and stage-specific funds, alongside agnostic funds.

Build a robust venture capital network through co-investing, board participation, and attending industry events. Learn to cultivate relationships with founders, startups, angel investors, and influential professionals.

Explore how strong branding combats rising startup competition by boosting inbound deal flow through leadership marketing and value-added services on platforms like LinkedIn, Twitter, YouTube, and Medium.

Venture capitalists seek opportunities with a very large total addressable market. A large market size enables higher potential exits and multiple successful returns for investors.

Highlight the importance of product-market fit in venture capital, noting fast market action and scalable distribution as signals that attract investment.

Founding team quality and a solid business plan guide venture capital decisions, emphasizing a diverse team and clear target audiences with validated demand.

Identify the term sheet as a non-binding agreement between venture capitalists and startups about stock investment conditions, highlighting valuation, liquidation preferences, and negotiable provisions.

Compare common stock, owned by founders, employees, and consultants, with stockholders, the investors. Learn how, in an exit, stockholders are paid first, then common stock.

Learn how price per share is set by the term sheet and how pre-money and post-money valuations, based on the investment amount, determine a company's current worth.

Investors vote on company matters under the term sheet. Protective provisions grant veto rights, so the company cannot repurchase shares without first stockholders' agreement.

Explore how the board of directors governs organizations by making strategic decisions while remaining separate from day-to-day operations; understand how board size varies.

Discover how the right of first refusal controls transfers of common stock, giving investors the option to purchase stock before it goes to outsiders when founders or employees sell.

Explore drag along rights in venture capital, where a majority of investors can compel minority holders to join a liquidation event.

Understand how vesting structures equity with a one-year cliff and monthly vesting, typically granting 25 percent after year one and the remaining over three years, protecting both co-founders and investors.

Explore non-compete agreements signed by founders and employees, including enforcement concerns and the geographic scope and time limits that almost everyone on the founding team signs.

Ensure pre-existing intellectual property created before company formation is transferred to the company, and clearly communicate that ownership rests with the company for all employees, consultants, and interns.

Explain esops and stock options, letting employees buy common stock later at a set price; founders set aside 10–20 percent of equity as an option pool to attract talent.

General partners are the senior members of a venture capital fund who raise funds, sponsor deals, and make major decisions, earning money only when deals succeed and exits occur.

Venture partners bring expertise and mentorship to companies, manage investments, and bring new deals for investments. They work part-time and advise the venture capital firm.

Explore the principles guiding venture capital investments, including how principles act as evidence and how thoughtful, democratic, and kind approaches shape fund outcomes.

Discover the role of associates in the basics of venture capital and how this lecture approaches foundational topics within the course.

Analysts typically are recent graduates who bring strong Excel and analysis skills, crunching numbers and writing memos as associates in venture capital.

Entrepreneurs in residence receive mentorship and advice from venture capitalists, guiding investments in startups, supporting due diligence, and expanding professional networks.