How Venture Capital Works PT1

good afternoon welcome to our discussion this afternoon on how venture capital works my name is Michael Hannah which I am head of life sciences for soaked belly bank on the East Coast now I'm pleased to introduce our guests this afternoon John men line who is our entrepreneur and is currently executive chairman of fake therapeutics Brian Roberts who is a partner with Ben rock and Judith alcea who is a co-founder managing director of weather gauge capital Brian described your firm's role in the ecosystem of startup companies sure Mike thanks so ventrac is a venture capital firm which means what we do is we about every three or four years raise a pool of money from what we call limited partners people like Judith and over a period of time attempt to invest that cut in that capital in terrific new entrepreneurial ideas companies run by people like John and then over some time period whether it's three or five years or eight or ten years we attempt to help John and his company grow flourish bring products to market and then gain liquidity out of that investment either through going public or a mergers and acquisition process in order to take that capital and then return it back to our limited partners okay and Judith can you explain to us what is a fund of funds and who are some of your investors sure right so a fund of funds is really an intermediate intermediary structure that institutional investors will commit capital to a fund of funds like weather gauge or other others of that type and then we in turn would select funds like Brian's and thin rock and other people of that type so that's how that works and Mike so there are a variety of different types of limited partners out there Judis giving you one one type that she works for one of the the firms that Judith used to work for the Kauffman Foundation is another type of limited partner so endowments and foundations have luckly been very large limited partners in venture capital funds so university endowments charitable foundation endowments there are also wealthy families which is really where the venture capital industry got started van rock was started by the Rockefeller family and so they remain a substantive limited partner for van rock and then you also have a variety of other large pools of capital pension funds insurance companies those sorts of people you Illumina partners are generally people who have a very long time horizon on their dollars so they're not looking for liquidity in their money in the near term but they're looking to make substantive multiples on their dollars over a long period of time and these institutional investors are not just US base they're global now in fact there's quite an appetite for for a u.s. venture from offshore investors oh yeah it's true and in fact lis there are you've seen a huge uptick in what you might call sovereign wealth funds right right um across the world you know if so there are actually countries who have large pools of capital that are now seeking to deploy those dollars into entrepreneurial endeavors via venture firms okay and so how did the dynamic work between your firm and Judis firm did you seek out judith as part of your fundraising how do you know each other how did that work sure so Judith and I met 10 or 12 years ago upon my entry into venture capital actually the Kauffman Foundation where Judith was at that point chief investment officer or CIL had a program of sort of apprenticeship in venture capital and we met through that and then and the Kauffman Foundation was in fact a Foundation limited partner in Ben rock so when Judith left and started her own fund of funds it was a natural relationship to continue so for us at least we put a huge premium on knowing our limited partners and having limited partners who will be limited orders for us assuming we perform appropriately over long periods of time so rather than simply you know our relationship that is sort of you know dollars in and dollars out on a very transactional basis these end up generally being long-term relationships where you seek to get more than just money out of your limited partners but advice and help and hopefully the other way as well okay and so John um you've been a very successful entrepreneur and maybe you could explain to us what's the what was the process for you either with your prior company or with a therapeutics did you approach Bryon for an investment did he come to you how did all of that process at work you know thanks Mike and it's nice to be here to talk about how venture capital works in general you know from my perspective it's a pretty interesting ecosystem because here we have people that might invest in a pension fund or a sovereign fund and then invest in a venture capital firm like Venrock and eventually that money will be deployed by entrepreneurs and what's exciting from my perspective is the deployment of that cash is in some of the most innovative areas of our society so whether it's telecommunications or biotechnology or green technologies all of a sudden there's an opportunity not only to get fantastic returns but really start to change the shape of the future for everybody and that gets me very excited and so with a firm like Venrock that I've known for a little over a decade there's really two ways to get venture capital firms involved so one way is for instance I might have an idea or I know a scientist that has an idea and then we start to work on that and germinate that idea to a point where we might bring it to a venture capitalist that's actually a dialogue because sometimes venture capitalists might have ideas as well or they know something else that they'd like to bring into the formation of a company and that's what I would sort of call initial company formation typically the right kind of alchemy between ideas people and money and then the second way is that there's an existing company it's already formed and usually at some point in time you need to think about how to build a syndicate of different venture capitalists and perhaps strategic investors in the company and in that second fashion is a way to bring in an additional venture capital investor into that syndicate to support the financial and it's a intellectual foundation of the company to really build a company that can do something extraordinary in society and that's the type of thing I think entrepreneurs like to look for as well as investors companies that are really going to change how we fundamentally do business how we might treat patients how we might communicate with one another and that ends up being a very exciting aspect from an entrepreneur and Mike it's it's important to note that you know when a when a venture capitalist or investor gets involved with a company it is a multi-year relationship that you're embarking upon um it's not a single investment notion so for instance you know for you when in your personal account when you go buy stock you know you go buy shares of you know Xerox or something you know that's a one-time investment that you then you know will decide to sell or not when we Venrock invest in companies like John's we generally put in perhaps 20% of the money that we expect to put in upfront so we will do what's called reserve three or four dollars for every dollar that we initially put in because for most of these companies they spend more cash than they bring in in revenues for some time period while they're doing product development depending on the industry that product development cycle can be short internet companies is you know can be a year or two year probability cycle pharmaceutical companies can be a 10-year product development cycle and so you're really you're when you're an entrepreneur seeking capital you get again in the same way that Venrock is looking for LPS that will be around for a long time if entrepreneurs are looking for very stable long term venture capital firms that will be there for the life that that entrepreneur is attempting to build whatever they have the dream of a building so John with respect to your most current company faith era pew –tx so how many firms do you say that you went to see and was it that you struck a deal with one of the venture firms perhaps Venrock with a lead and then all the other investors followed in suit how did that hold that in the Corp sure no I think it's a great question and a part of this goes to I think Brian's point on how the ecosystem and venture capital is one very relationship driven because I think that ends up being a proxy for a whole bunch of different important things judgement calls on how to deploy cash you really have to have a matching of minds and how to do that because I think most entrepreneurs find that it's a real privilege to be able to go invest something and do all of these innovative amazing things with that cash second thing is just trust in sort of personal relationships so in the case of Venrock they are actually an investor in a company that I ran in Boston called it nexus therapeutics and Nexus ended up being a very interesting exit for the investors and then there was an opportunity in the wake of that exit to work with another potential Venrock company and in this case

24 thoughts on “How Venture Capital Works PT1

  • Question to follow on top as a VC could you only invest into startups companies or could you invest into middle or large size companies such as Boeing, APPLE, LMT and so on? I hope someone can answer it well help a lot

  • The video gives a thorough explanation of what venture capital is, some may consider it useful but for anyone doing a degree in economics/finance/business, or already has one, or perhaps has read a few articles here and there, it sounds so dull and boring as if you are explaining to chimpanzees.

  • Sorry to bother everyone, but I have a question. I'm in the 10th grade (young I know) and I like to consider myself as a good student. Now that that's out of the way, I would like to ask which college would YOU recommend for me to go to. For example, a New York City based college would have its perks in being located in the financial capital and thus gain connections, while other colleges outside of the New York area will offer the best of the best education but will not offer the same tbc…

  • Venture capitalists can be individuals who invest in businesses or they can be complex multinational investors. This is a great discussion.

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  • Brian (the middle guy) kinda looks like Giovanni Ribisi. ANd it's nice to heare about the POV of the party's themselves.

    @californiaspinnaker: you saying it yourself. It's the job of those (Venture )Capital investors to assess the potential of the startup. Losing the seed is for their own risk. However, thats where the business lawyer can come in to negotiate creatively to reduce risk.

  • ive learned so much about VC just from watching this video……awesome totally awsome………by the way the lady is a doll

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  • I watched all 6 parts, very informative, concise and loads of information. Thank you Michael Hanewich, John Mendlein, Bryan Roberts and Judith Elsea for giving us your valuable time and knowledge.

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