Venture Capital Defined | Claudia Zeisberger

Summary

Claudia Zeisberger, a professor at INSEAD, offers an introductory session on venture capital (VC), explaining terminology and the operation of VC funds within the startup ecosystem. She discusses the high-risk, high-reward nature of investing in early-stage startups, contrasting it with more established companies targeted by growth equity and leveraged buyout funds. Zeisberger also outlines the roles of various players, from entrepreneurs to limited partners, and touches on the mechanics of VC funding, including the 'two and twenty' fee structure and the distribution of profits.

Takeaways

• 📚 Claudia Zeisberger is a professor at INSEAD focusing on the private capital space, particularly venture capital (VC).
• 💼 The introductory session aims to clarify VC terminology, explain how VC funds operate, and discuss the players in the startup ecosystem.
• 🦄 The script mentions various unicorn startups and their potential paths to IPO, highlighting the high-risk, high-reward nature of VC investments.
• 🏦 VC funds invest in minority stakes of early-stage startups, which are often pre-profit, pre-revenue, and sometimes even pre-product.
• 🔄 The script contrasts VC with leveraged buyout funds and growth equity funds, which invest in more established companies with proven business models.
• 🌐 Examples of renowned VC firms such as Sequoia, General Atlantic, and KKR are provided, along with their respective portfolio companies.
• 💡 Startup entrepreneurs can seek funding through various means, including bootstrapping, crowdfunding, angel investors, accelerators, and incubators.
• 🤝 The role of a VC includes providing expertise, mentorship, and networking, in addition to funding.
• 🏢 Corporate VCs (CVCs) and venture builders are newer developments in the VC landscape, focusing on creating startups from scratch or investing in corporate-backed ventures.
• 🤑 The mechanics of a VC fund involve general partners (GPs) raising capital from limited partners (LPs) and investing in startups with the expectation of high returns.
• 💰 VCs make money through a management fee and a share of net profits, commonly referred to as 'two and twenty', with a distribution waterfall ensuring LPs are repaid before GPs receive carry.

Q & A

Who is Claudia Zeisberger and what is her focus at INSEAD?

Claudia Zeisberger is a professor at INSEAD, focusing on the private capital space, particularly in venture capital.

What terminology will be clarified in the introductory session to venture capital?

The session will clarify terminology in the VC space and explain how venture capital funds operate.

What is a startup according to the script?

A startup is a company that is pre-profit, pre-revenue, and often pre-product, typically consisting of a few entrepreneurs with a conceptual idea.

How does venture capital fit into the private equity space?

Venture capital funds invest minority stakes in early-stage startup companies, which is a high-risk investment strategy due to the unproven business models and cash flow negative nature of startups.

What are the differences between venture capital funds, growth equity funds, and leveraged buyout funds?

Venture capital funds invest in early-stage companies with minority stakes and high uncertainty. Growth equity funds invest in established, often fast-growing companies, and leveraged buyout funds deal with established companies, acquiring majority stakes and looking to improve existing business models.

Can you name some examples of venture capital-funded companies mentioned in the script?

Examples include Airbnb from the U.S., Gojek from Indonesia, Spotify from Europe, and Xiaomi from China.

What are some early-stage funding options for startup entrepreneurs?

Options include bootstrapping, crowdfunding, angel investors, accelerators or incubators like Y Combinator, Techstars, and Dream it, Mass Challenge.

What is the role of a general partner (GP) in a venture capital fund?

The GP is the main partner responsible for deal sourcing, executing deals, and working with portfolio companies within the VC fund.

How does a venture capital fund make money?

Venture capital funds make money by charging a management fee to limited partners (LPs) and by sharing in the net profits of the fund, typically through a 'two and twenty' model where the GP receives 2% of assets under management and 20% of net profits.

What is the 'carry' in venture capital and how is it distributed?

Carry, or carried interest, is the share of net profits that the GP receives from the fund. It is typically distributed after the fund has returned all invested capital to the LPs and paid a hurdle rate to the investors.

What is the typical life cycle of a venture capital fund?

The life cycle starts with LPs investing in the fund, the GP making investments in portfolio companies, managing those companies to a successful exit, and then distributing the invested capital plus profits to the LPs. LPs may then decide to reinvest in successor funds of the same GP.