VC Basics

Frank Demmler
 Rule of Thumb Metrics
 Fund size drives a lot of key decisions
 Generally, no more than 10% of committed capital in any one
deal
 Generally, reserves are set aside for future investment; 100%
is not unreasonable
 Result, no more than 5% of the fund will be committed with
the first investment
 Fund may be managed to build a portfolio of about 20
companies, give or take

(c) Frank Demmler 2011 - all rights reserved

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 Legal Entities
 Most private venture capital funds are limited partnerships
 The VC firm is the general partner
 The investors are limited partners
 A fund typically has a ten year life
 Each fund is a separate legal entity, usually denoted by
Roman numerals (VC I; VC II; …)

(c) Frank Demmler 2011 - all rights reserved

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 A fund typically has a ten year life

 First three years – invest & commit the fund

 Second three years – work with company to build value
 Last four years – achieve liquidity

(c) Frank Demmler 2011 - all rights reserved

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 Successful VCs
 Will have multiple funds under management
 Staged to be at different points along life cycle

(c) Frank Demmler 2011 - all rights reserved

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 Why do it?
 2% management fee puts bread on the table
 20% carried interest is the “prize”
 For example, $100 million fund
 Has exits cumulating to $300 million
 Investors get:
Their original investment: $100 million
80% of the gain: $160 million
VCs get 20% of the gain: $40 million

(c) Frank Demmler 2011 - all rights reserved

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