The following are high level notes of Tom Churchwell’s speech discussing venture capital at The University of Chicago Graduate School of Business (Chicago GSB). This talk took place in Chicago on January 22, 2008. I’m posting it today in celebration of this week’s Midwest Venture Summit.
Typical Fund Structure
– Management Fee 2.5% of committed capital
– Carried Interest – after losses offset by profits
– 80% Net Profit – Investors
– 20% Net Profit – General Partner
– 50-70% desired return…
– Vesting occurs over 5 years
– Experienced, successful entrepreneurs abound throughout the country
– Start-up companies have access to abundant early-stage venture capital
– Skilled attorneys, accountants, consultants are readily available
– The majority of start-ups can result in successful IPO’s within 2-3 years
– Increasingly hedge funds are an alternative financing source
– Angel capital is more available in Chicago than it used to be
– The space a VC plays in is extremely important – industry sector, growth
– Tom has changed management 3 times on average in the 60 companies he’s invested in
– Buckets of entrepreneurship seed entrepreneurs, beta stage, scaling skills
– Discipline = Success
Criteria:
– Proprietary product or service
– Sustainable competitive advantage
– Viable business model
– Large markets
– Experienced management team
– Appropriate use of funds
– Target 10-15x growth 5-7 years
– Objective: Sale of IPO in 5-7 years
Management:
– The most critical resource
– More important than all other elements
– Stage appropriate, later stages may require different management
– Must have a significant stake in success
– Tom says “Management experience is management experience, big company experience is just as good as small company experience in his view.” (Note: I actually find a *mixture* of both sizes in your experience to be of high value)
“We don’t make money on IPO’s, we make money selling to the Baxter’s, Motorola’s etc.”
“Nothing succeeds like revenue, it’s the cheapest form of capital.”
In 60+ company investments, I can only say that once it was the technology that made the company fail. It’s about getting the product in the marketplace.
What makes you say yes?
Passion. A product I have to get on the marketplace that solves a real problem. Management discipline which means they can step back and say realistically this is how long it will take, this is the team you will need, etc.
Revenue is an outcome, it’s not a driver. What is going to cause the business to scale? It’s business model testing. I don’t care about year 5, I care about what will get us more proof of concept and closer to a success.
The first screening process is where did this plan come from, if another VC sent it to us, we pay attention more. I ask, “Do I want to have a beer with this guy? You shouldn’t be there if you can’t say yes. ”
60% of the time we at least get our money back.
Scientific Board of Directors (compensated with a point of equity +/- a bit)
– Should be at least equivalent in stature to the scientific founders
– Like the Board of Directors, should have complementary skills
– Used properly, play a vital strategic role
– Typically meet semi-annually
Tom never signs an NDA.
The Business Plan
– Executive Summary is most important
– Shorter is better
– Assume the full appreciation of the technology will come in the due diligence
– Avoid jargon
– Avoid the hockey stick
– Focus on the revenue model
– Have a realistic exit strategy
– IPO’s are rare – most VCs are quite happy with a nice M&A exit
– Nobody reads the full business plan – I care about the executive summary
– Cashflow is more important than revenue during this phase
– Speaking of Jason Calacanis and Mahalo, you see me asking a question of Jason in this photo after his speech. Regardless of whether you 