ShmoopTube

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finance a la shmoop- what is venture capital? Google Facebook Yahoo Netflix

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LinkedIn snapchat Instagram well they were all originally funded by venture [logos flash across screen]

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capital. and the common theme was that two college dropouts built these

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companies starting in a garage in Silicon Valley, creating something

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dot-com that would change the world. and the world's a mess so it needs a lot of

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changing. venture capital comes in a few flavors-

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the earliest rounds are called seed capital, and it usually mean that an

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original investor put in a few hundred grand, maybe a million or two .the money

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was invested at the very beginning of a company when it usually has no revenues [seed capital defined]

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no product no nothing. just a hope and a dream and a big idea .and the idea can be

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huge. at one point Yahoo's original seed

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investment returns 10,000 times its original capital. a regular seed level

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investors are called angels and they are typically previously

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successful founders or entrepreneurs who want to recycle precious high risk

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capital back into the Silicon Valley ecosystem in that form. and yeah Angels [man holding money looks excited]

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know that 99 plus percent of their investments go fully bankrupt, but a few

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become lottery ticket winners which produce massive returns and those

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returns make up for the many many many losses. well once a company has say a

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million bucks in revenue and has likely burned through the original seed money

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million-ish or so that they raised, well they would then seek to take in what's [money burns in a fire]

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called an a round. ie a first level full venture capital round where the company

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raises four or five million dollars to then bring it to the next level of

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growth. either in product use or revenues or depth and power of its patents or

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intellectual properties and so on. anyway later stages of venture capital

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investment are cleverly tagged B C and D rounds. and when a company is in the tens

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of millions of revenues looking at a hundred million around the corner well

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they would raise what is called growth capital- if they're no longer a [people peek around a corner]

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speculative venture and they then appeal to a lower risk lower reward group of

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investors. so where does the venture capital money come from? well the initial

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seed amounts are relatively tiny. a pocket of 50 million dollars might fun

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a hundred early startup companies for years and in the scheme of all the

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wealth and Silicon Valley well 50 million bucks is just lunch money. a

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normal sized venture capital fund might have half a dozen partners and another [business people smile at each other]

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half a dozen junior partners .it would raise money from what is called limited

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partners and that has nothing to do with the department store. the people

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responsible for investing the money diligently are called the general

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partners, and for this pleasure the general partners charge roughly 2% a

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year in management fees and then they also take a 20 to 30 percent success fee

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or carry if their fund pays back all of its initial capital and then has real

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profits. so for a normal-size venture capital fund now let's say there's just

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four general partners if they raise four hundred million dollars, invest it well

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and in say eight years they've produced maybe a dozen IPOs and they've sold [graph showing growth]

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maybe a half a dozen other companies so that the 400 million originally raised

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has now turned into 2.4 billion dollars well they would show a profit of 2

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billion bucks, and if their carry was 25 percent then the partners would split

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five hundred million dollars among the four of them. and they'd get that all in

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addition to the nice fat salaries they were taking along the way, so yeah it's a

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nice work if you can get it and then there's the other side of the street as

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an entrepreneur, if you're looking to start any sort of major venture you'll

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need to attract some venture capital unless you know you and your buddy in

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the garage have a couple mil just lying around with nothing better to do. [two people sit behind computer screens]

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