Venture Capital and the

Entrepreneur:
A Matter of Fit

Glenn A. Okun
Clinical Professor of Management &
Entrepreneurship
NYU Stern School of Business
gokun@stern.nyu.edu
 The Players
• Entrepreneurs
• Venture Capitalists
• Agents
 Venture Development

Cash Flow

Time

Start-up Growth Maturity

 What is a venture capitalist?
General Partners Limited
(effort) Partners
–Generate deal flow (capital)
– Screen opportunities –Pension plan
– Harvest investments – Endowments
– Negotiate deals – Life insurance companies
– Monitor and advise

Fees + 20% Return

of profits on Capital

Venture Capital Fund

Portfolio Companies
Venture Capital commitments and investments vary widely …

Venture Capital Raised & Invested

120000

100000

80000

60000

40000

20000

0
1997 - 2003
 … driven by recent historical returns.

Venture Capital Returns (5-year IRR)

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%
1997 - 2003
 The Venture Capital Cycle

IRR $ Deals IRR $ Deals

 Supply of VC is not the only
constraint
• Costs of capital
– Price (valuation)
– Terms
– Holding period
 Valuation Theme
• The objective is always to value future cash
flows
• DCF is the typical approach to corporate
finance projects
• Venture opportunities tend to have back-
weighted cash flow streams that challenge
DCF methodologies
 Venture Capital Method

Raw ownership = investment/{terminal value/[1 + r]T}

(excluding dilution)
 Terms:
Private Equity Securities
• Structural Features (control & economics)
– Preferences
– Vesting provisions for employee shares
– Covenants and super majority provisions
Venture Capital May Not Fit The
Venture
• CAGR and investment horizon
• Industry
• Objectives
– Strategic
– Personal
 Alternative sources of capital for
venturers
• Bootstrapping
• Self, Friends, and Family
• Business Angels
• Small Business Investment Companies (SBICs)
• Trade Credit
• Asset-based Lending
• Mezzanine Capital
• Private Placements of Equity and Debt
• Public offerings of equity and debt
 Entrepreneurial Financial
Strategy
• Financial plan should fit the business plan

opportunity risk resources deals

Control vs. capital expenditures

Capital investment vs. strategic value