Lecture 3

Question 1

What are the different venture firm differentiations?

Answer 1

• Stage
• Sector/Theme
• Service
• No-focus

Question 2

What is stage venture firm? What are the pros/cons?

Answer 2

Experience at that stage

Pros: understanding of risk they are underwriting

Cons: Can’t follow on with more $$$ in a significant way

Incentive Model: Buy ownership at that stage, no chance to build it overtime

Question 3

What is a sector/theme firm? What are the pros/cons?

Answer 3

Deep domain expertise

Pros: network of introductions in your field

Cons: Too much sector knowledge can harm innovation

Incentive Models: Build these about market change and find companies that match it

Question 4

What is a service firm? What are the pros/cons?

Answer 4

Talent help, growth help, marketing help, etc.

Pros: If you tap into the resources, it could save you $$$

Cons: Limited value add, the service is “all marketing”

Devote a lot of time to companies to help add value (more time = more escalation of commitment)

Question 5

What is a no-focus firm? What are the pros/cons?

Answer 5

Strategic thought partner, just capital

Pros: Broad scope of things they can be helpful with

Cons: too generalist

Incentive model: Do the best deals regardless of size, stage, what I can add

Question 6

What are the different types of stages in VC?

Answer 6

Seed Stage
Series A
Series B
Growth Stage

Question 7

What is Seed Stage?

Answer 7

No data
Just an idea
Portfolio Construction: more deals, high risk, own less
Looking for: massive market, great founder, early positive feedback

Question 8

What is a Series A Stage?

Answer 8

Looking for and validating Product-Market fit

Someone willing to pull out a wallet

I found something that the market is willing to pay for and I need money to grow it (understand margins)

Spend money to get customers

Question 9

What is a Series B Stage?

Answer 9

I have a formula for success

I’m not evaluating how to go to market

I know that when I spend a dollar you know how many will purchase or how many customers you will acquire

Looking for: repeatable growth
If I invest $1 in sales, how many dollars do I get back?

Question 10

What is a growth stage?

Answer 10

Looking for: path to exit within 5 years

Opportunities to tangentially increase the market size or product offering

Start optimizing for margins here
Now you have to find the customers who will use the product

Portfolio Construction: fewer deals, lower risk

Question 11

What does it mean if you do everything wrong as a founder, but your product still sells?

Answer 11

Product market fit is a market pull
- The need/requirement for a new product or a solution to a problem, which comes from the market place.

Question 12

If you know you have product-market fit, what should you do as a founder?

Answer 12

Invest more capital in growing the business

Question 13

How do you calculate product market fit?

Answer 13

Looking at TAM, SOM and SAM

Question 14

What are the attributes of a Fintech Sector-Focused firm?

Answer 14

Payments, Lending, Banking infrastructure, real estate

LPs usually include major banks, strategic finance companies

Try to get a critical mass of companies that can benefit LPs

Question 15

What are the waves of massive innovation in the past?

Answer 15

Internet
Mobile
Cloud
Social

Question 16

What are the attributes of a Web3/Crypto/Blockchain-focused firm?

Answer 16

Can usually make investments in tokens or equity (most of them require an equity investment
before investing in tokens)

Question 17

What are the attributes of an e-commerce firm?

Answer 17

Infrastructure of commerce, payments, checkout, returns, etc

Popular in last decade but have fizzled out

Retail businesses

On shopify so don’t own infrastructure

Question 18

What are the attributes of an enterprise software firm?

Answer 18

Most popular type of fund

Metrics are standardized, everyone understands it

Lots of VCs ran software companies, so familiarity is high

Capital efficiency is high (80%+ margins)

Question 19

What is the next waves of innovation that can be seen in 2023?

Answer 19

Web3
Quantum

Question 20

What are the different types of service-focused firms?

Answer 20

• Talent
• Growth Playbook
• Corporate development
• CFO mentorship

Question 21

What is a talent service-focused firm?

Answer 21

One of the toughest things for an entrepreneur to manage well

VC’s build talent platforms to help companies source talent

Question 22

What is a growth playbook service-focused firm?

Answer 22

Helping companies benchmark their metrics against “best in class”

VC’s have access to lots of company data so they can help with this easily if they are organized

Question 23

What is a Corporate Development service-focused firm?

Answer 23

VC’s often employ bankers, lawyers, corp dev people to help companies map their ecosystems, build relationships with acquirers, evaluate inbound acquisition interest, etc

Question 24

What is a CFO-mentorship service-focused firm?

Answer 24

Many VC’s have finance background so can help on the governance, finance side of things to ensure things are in order and have proper oversight

Question 25

As a founder how do you feel about service-focused VC firms?

Answer 25

Some may appreciate the support, but most founders want to do it all in house and don't want to have the VC deep on this. Corporate Development: - Don't want to share a lawyer - VC might have different agenda (building relationships with acquirers to sell/buy even though it might not align with founders goals) Talent: VC might put their friends in positions within the business Very few firms execute this properly

Question 26

Where does the money for the services of a VC in a service-focused firm come from?

Answer 26

Comes from management fees - Extremely costly - Lots of employees - Partners (those who do investing) could put more in their pockets if they didn’t have the employees. - Have to make sure the team to performing well and making them a SHIT TON of money to recoup costs

Question 27

What is the thing that VC is the most helpful within the early stages?

Answer 27

Most helpful with an introduction to networks (can help introduce you to people for next round) and help you understand the market (have a broad scope across the market and can tell you what to be aware of)

Question 28

What should a GP consider if they are designing their firm with a large team?

Answer 28

- How do you build that firm and ensure to are generating enough value? - What is the potential downside of all these employees? - What is the chain of command and how will decisions be made?

Question 29

What is a no-focused firm?

Answer 29

True generalist firm (across sector and stage)

Question 30

What are the elements of a non-focused firm, and why would a GP decide to do this?

Answer 30

PROS: - you can do any deal - you can be opportunistic - you can pursue any founder CONS: - If not done thoughtfully, focus can be lost - understanding of each individual market can be low - portfolio construction may pose a challenge Some HOLD THE BELIEFS THAT...: - experience is bad (make you only be able to engage based on your experience rather than see the big picture) - broad market expertise as they are deeply involved in the market daily -

Question 31

What is a venture studio?

Answer 31

Venture studios create startups by incubating their own ideas or ideas from their partners.

Question 32

What is an accelerator?

Answer 32

A startup accelerator is a mentor-based program that provides guidance, support and limited funding in exchange for equity

Question 33

What are the pros/cons of a venture studio model?

Answer 33

PROS: - Time - Help founders grow - Provide resources founders need to expand - de-risking the idea - having an early investor CONS: - Take a percentage - Move with what the LP’s want (could damage entrepreneur) - high dilution for the founder - potential for board conflicts

Question 34

Where might venture studios lead to conflict between CEO and investor?

Answer 34

- board management - who is in control - the cap table (ownership structure) may not be appealing to a new investor

Question 35

From the perspective of the venture capitalist, who is the customer?

Answer 35

The LP is the customer given they provide the capital and direct how the GP should behave. The entrepreneur (company) is the product.

Question 36

Make arguments for and against the impact of interest rate environments on; a. The amount of VC dollars being deployed b. The amount of VC funds being raised c. The quality of companies

Answer 36

a. As interest rates increase the amount of VC dollars decreases as firms sit on dry powder for longer. Counterpoint: some investors like to get exposure to all market cycles given exit windows are 10 years away b. As interest rates increase VCs will have a harder time raising funds as LPs can field yield elsewhere for less risk c. As interest rates increase the quality of companies may increase due to the higher bar set for talent and capital.

Question 37

How do you balance risk/reward in trying to ‘catch the next wave’ vs investing in proven businesses and technologies that are already prevalent?

Answer 37

You must catch the next wave to truly find ‘power law’ companies, but you must make sure they will mature under the timeframe of your fund (usually 10 years) If they mature after the 10 year window you wont get any advantages

Question 38

What conditions might create another wave of perfect conditions for finding outlier companies?

Answer 38

High interest rate environments

Question 39

Describe the difference in your due diligence process as a venture capitalist of determining how to understand a Seed stage company’s risk profile vs a Series B stage company?

Answer 39

Series B: quantitative, more data to analyze, modelling, Seed: CEO background, the idea, market conditions, the team

Question 40

Describe how you might manage portfolio construction differently depending on whether you focused on Seed only vs Series B only

Answer 40

If I’m a seed fund I want to do lots of deals since there is a higher risk of loss so I need enough company diversification. If I’m a Series B fund, I can withstand less companies since each underlying company contains less risk.