2. Venture Capital — Funds, Angels & Entrepreneurs (Chris Yeh)

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Chris Yeh joins Nick on The Full Ratchet to discuss Venture Capital…  Angels, Funds & Entrepreneurs including:
  • ChrisYeh2014HighResWhat is venture capital?
  • Where does venture capital fit as an asset class?
  • What is the standard time it takes to get a return?
  • How is it similar to & different from more common investments like public equities?
  • What is a venture fund & what is a fund manager’s key functions?
  • From the time that an investor first identifies a start-up to when they make an actual investment… walk us through the process of what happens in-between?
  • How do investors make money?
  • How do VCs make money?
Direct-audio:  http://bit.ly/1pu6W8b


Guest Links:


Key Takeaways:

1- Startup investing vs. the public stock market

Chris talked about how the only real similarity between Venture Investing and Public Stock investing is that you are investing in the equity of a business and your return is dominated by the performance of that business.

The Key Differences to be aware of are:

  • Liquidity
  • Market Price/Value transparency
  • Results can be determined immediately vs. long time-horizons before exit in venture
They are very different asset classes, so remember that if you’re new to this and haven’t taken the time to really learn how it works, it is very easy to lose your entire investment.


2- The Startup Investment Process
We talked about the Startup Investment Process for VC’s consisting of seven stages.
  1. Identification
  2. Initial Screening (getting to know the entrepreneur and basics of the business)… typically one representative from the VC
  3. Second Screening (deeper dive- workshop, specific Q&A)… can include multiple representatives, subject matter experts, or other trusted entrepreneurs in the VC’s portfolio
  4. Light Due Diligence
  5. Partner Meeting or circulated memo where initial investment thesis is presented (link to Youtube investment Thesis)… “socialized the deal”
  6. Entrepreneur invite to present at Partner Meeting
  7. Terms and Due Diligence
I mentioned on episode one that this is a more involved process than Shark Tank…  and if you’re making investments in startups, think about how the experts are doing it.  Will you have a partner meeting as an individual?  Probably not.  But it’s not difficult to get together with a small group of friends, business executives and/or angels in your area…  and help each other evaluate.  Again, a huge part of this business is dodging bullets, so if someone you trust sees something that you don’t and it poses a significant risk… that can be very helpful.


3- Venture Capital Fees
Chris had an interesting point when we discussed fees for VC’s…
He mentioned how most standard fee structures for Venture Funds are 2 & 20
  • 2% mgmt fee
  • 20% carry

And, for many smaller VC funds, that management fee tends to be a little higher than 2%.

But the key point here is that venture fund mangers only really do well financially if they do well for the fund and it’s investors.  Different than PE or Hedge Funds where the management fees alone make many rich, regardless of performance.  So the message is not to avoid other asset classes and funds…  we all need to diversify… but in an investment world of misaligned incentives, it is refreshing to hear that venture is an asset class the professionals only do well when the investor does well.


Tip of the week:  Have an investment focus