1. Venture Capital and Entrepreneurial Finance
Ken Weakley
August 9, 2018

2. Key Ideas: VENTURE CAPITAL & ENTREPRENEURIAL FINANCE Today
Historical Perspective Matters
Does history repeat, why?
How can you benefit from this knowledge?
History
The Cycle of Boom & Bust
VC and Entrepreneurial Finance
8/9/2018

3. The Essence of VC VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
VC and Entrepreneurial Finance
8/9/2018

4. Where they are... VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
VC and Entrepreneurial Finance
8/9/2018

5. Funding over time... VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
VC and Entrepreneurial Finance
8/9/2018

6. Distribution of sources...
VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
Distribution of sources...
VC and Entrepreneurial Finance
8/9/2018

7. The Lessons of History VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
VC and Entrepreneurial Finance
8/9/2018

8. A lot can happen in 100 years!
VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
A lot can happen in 100 years!
VC and Entrepreneurial Finance
8/9/2018

9. A lot can happen in 100 years!
VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
A lot can happen in 100 years!
VC and Entrepreneurial Finance
8/9/2018

10. Fiscal Realities VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
VC and Entrepreneurial Finance
8/9/2018

11. A Decade to Remember! VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
VC and Entrepreneurial Finance
8/9/2018

12. Not the First Time! VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
Tulip Mania: 1637
South Sea Bubble/Mississippi: 1720
Most the 19th Century!
1907: Kickerbocker Trust & JP Morgan
1929: The Great Crash and Depression
1980s: Latin America Debt and “1987”
1989: Japan peak
1997: Asia
2007: The Great Recession
2012: Euro/Greece
VC and Entrepreneurial Finance
8/9/2018

13. More History VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
VC and Entrepreneurial Finance
8/9/2018

14. More History VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
VC and Entrepreneurial Finance
8/9/2018

15. More.. VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
VC and Entrepreneurial Finance
8/9/2018

16. More... VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
VC and Entrepreneurial Finance
8/9/2018

17. More... VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
VC and Entrepreneurial Finance
8/9/2018

18. More... VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
VC and Entrepreneurial Finance
8/9/2018

19. VC, Exit and the Market VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
VC and Entrepreneurial Finance
8/9/2018

20. The Impact of Public Markets
VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
The Impact of Public Markets
VC and Entrepreneurial Finance
8/9/2018

21. More.. VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
VC and Entrepreneurial Finance
8/9/2018

22. More... VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
VC and Entrepreneurial Finance
8/9/2018

23. VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
Venture Capital Defined
A firm that pools capital to provide early-stage equity or equity-linked financing to high-potential entrepreneurial opportunities – that can be harvested for substantial profits.
At what point do Venture Capital firms traditional invest in a business?

24. VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
Venture Capital – Industry Preferences
s – Computers / Hardware
1970s – current / Life Sciences, Biotech
1980s – current / Software
1980s – current / Telecom, Mobile
1990s – current / Internet, E-Commerce
2000s – current / Storage, Cloud computing
2000s – current / Green technologies

25. VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
Venture Capital – Benefactors
Entrepreneurs / Wealth effect, credibility
Investors / Access to high risk/reward deal flow
Employees / High paying jobs, Wealth effect
Government / New tax base
Consumers / Better, cheaper products, break-thru medical treatments, etc.

26. VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
Venture Capital – Historical Development

27. VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
Venture Capital – Historical Development
Still very young – cottage industry up until the 1970s.
Pre-World War II Era:
Most venture investing came from
wealthy individuals and families
1946 :George Doriot / ARD
Beginning of Professional VCs Formation of American Research & Development (ARD)

28. VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
Venture Capital – Historical Development
ARD’s Early Performance
$3.5 million was raised ($2 million from institutional investors)
By end of 1947, ARD had invested in eight ventures, six of which were startups
By 1951 the performance was still lack-luster (stock price was at $19 down from the initial offering price of $25 in 1946)

29. VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
Venture Capital – Historical Development
ARD’s Later Performance:
In 1957, ARD had invested $70,000 in the startup company Digital Equipment Corporation (DEC)
1972, ARD was sold for $813 Per Share
Original ARD investors received a compound annual return of 14.7% due primarily to DEC
Without the DEC investment, the rate of return would have been only 7.4%

30. VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
Venture Capital – Historical Development
1953:
Small Business Administration (SBA) was formed. Government began focusing on new business formation
1958:
SBA Created Small Business Investment Companies (SBICs). Due to tax and leverage advantages, the SBIC became the primary vehicle for professionally managed venture capital

31. VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
Venture Capital – Historical Development
Late 1960s-Early 1970s:
Vietnam / Recession destroyed capital formation.
SBICs began having operating problems due to the mixing of risky venture investments & high financial leverage (debt service commitments)
Total of $10MM raised by Venture Funds in 1975.

32. VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
Venture Capital – Historical Development
Late 1970s-Early 1980s:
ERISA changes “Prudent Man” standard to allow pension funds to invest with VCs.
Tax Revenue act of 1978 lowered cap gains tax
Apple & Genentech go public
Confluence of above events triggered a cycle of heavy VC activity throughout the 80s

33. VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
Venture Capital – Historical Development
Late 1990s-Early 2000s:
Another boom/bust period
Netscape IPO in 1995 kicked off internet era. Tons of capital raised to invest in internet companies/technologies.
Market crashed and investors lost appetite for internet plays. Lots of funds cratered as the value of their portfolio companies dropped below the value of invested capital.

34. VENTURE CAPITAL & ENTREPRENEURIAL FINANCE
Venture Capital – Historical Development
Today:
Approximately 900 active Funds
Hot areas: Life Sciences / Green Technologies / Social & Mobile media
Overall investments are still below levels.