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How Venture Capitalists Evaluate Potential Venture Opportun

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Wenjin Wang

on 23 January 2016

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Transcript of How Venture Capitalists Evaluate Potential Venture Opportun

How Venture Capitalists Evaluate Potential Venture Opportunities

Case Introduction
4 venture capitalists shared frameworks in evaluating potential venture opportunities
Evaluate Business Model
Evaluating Business Model
Role of Risk
Mitigate Risk
Maximize Profits
Evaluate Potential Opportunities
Process of Funding Decision
Russell Siegelman
Education and Background
High educated with degrees of MS or MBA in prestigious busiess schools

Worked as analysts, consultants... Familiar with software and internet industries
- Evaluate potential opportunies
- Evaluate business models
- Conduct due diligence
- Make funding decisions
- Perform financial analysis
- Risk
- Exit route

Systematic Emerging Market Selection

Emerging industries - enough potential ???
Vertical Market
Same industry, specific audience
Grow the Business
Eg: Hotmail
Skype -R.S.

Grow to a large scale to be profitable

For PEOPLE rather than its business potential
Reduce risk
- Consult analysts, customers and other experts
- Hire good people
- Analyze companies we didn't invest in

Internal agreement -> action plan -> track
Based on Jim Harvey's speech structures
Financial Analysis
- Hardware: BOM and Selling price
Software: cost to sell

- Market (large, growing) is important

- Rule of Thumb
IT - 200k-300k big market
Vertical: 1millon


Due Diligence
Sonja Hoel
Fred Wang
Robert Simon
Entrepreneur & Team

Meet needs?
If ..., would ...? and $?

Customer pain? How effctive delivering the message? - R.S.
Key for certain industries
Eg: engineering
Industry experts
- idea, team, market,

consult entrepreneurs from previous investments
How they execute?
Friends with them?
Ask people who also work with
them before (reference check)
All about business angle, the model, and the momentum

Risk-to- Reward ratio

Return < 5 times investment
high risk - 10 times

Thank you !
Xin Ma and Wenjin (Ivy) Wang
Expense and Revenue Model
Expense model: identify all costs and expenses
$ to get CF breakeven?
Potential Exit Route
How to choose

Going public (IPO)
Systematic liquidation of assets
Outright sale (MBO)

Consider your future role in business
Evaluate your liquidity needs
Access market conditions
Think about future business potential
Tax libility
3 Strategies
Not diversified, smaller population, competitive, not flexible
market size
A good company can do well by itself.

A technologist drives the company!
patents no necessary
Prefer companies with some customers or sites ( eg: 18 -month window F.W.)
Avoid tranche investments
R.S. F.W.
Revenue - Cost = Gross Profit
No direct sales force, prefer 3rd channel
Develop new products, meet customers needs
Produce free cash flow (Equity)
Using competitors numbers

Calculate average gross profit in the industry
Compare to the evaluating model
You are the investor!
Full transcript