Venture Capital Model

Hi Guys,

With respect to calculation of returns on a venture capital model, specifically for series A funding, I have a few questions:

  1. Is the allocation of Equity All to preferred? What is a range of acceptability for preferred returns (specifically on series A consumer brands)
  2. Are there generally anti-dilution provisions between rounds for existing capital
  3. When does exit/partial exit for a series A fund occur generally? Subsequent funding rounds, eventual ultimate buyout or IPO exit etc (or do you just assume a terminal value at the subsequent round etc)
  4. Am I overthinking it? Do series A funds even build out expected returns models or is it all about market sizing and thinking about downside scenarios/potential areas of liability.

Comments (3)

 
Aug 26, 2019 - 11:54am
  1. Depends on the deal structure. Typically you will see Series A investors receive Series A Preferred Shares. IRR of >20% is good enough. Most firms will target ~30% IRR.

  2. Yes, investors will generally ask for rights to maintain their ownership stake. Dilution provisions are rarely full ratchet anti-dilution clauses (these are the worst and are a red flag), but are usually weighted averages. Other typical terms: tag along rights, ROFR, ROFO, pay to play, etc.

  3. M&A is still the most common exit path. Secondary action is highly dependent on geography.

  4. I have not come across a Series A VC that does not do their own returns analysis. Only a mediocre Series A VC would not do so.

 
Aug 26, 2019 - 1:42pm

I just looked at a sample cap and waterfall, so now this makes more sense. However, I have another question - do you typically include a 3-statement model in the output for a VC case or is it just the cap table with an exogenously assumed precedent valuation at exit?

It just seems like a 3-statement model would appear so ridiculous (zero CF, baloon at exit, all the more difficult to flex the exit timeline in various cases)

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