Venture Capital Deal Sourcing And Screening Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies (2024)

FAQs

What is the deal sourcing process in venture capital? ›

Deal Sourcing in Venture Capital

It's the process of identifying, screening, and evaluating potential investment opportunities. There are several key factors to consider when developing your deal sourcing strategy, such as network, referrals, contact information, source deals, and networking.

Financial Viability: VCs evaluate the financial health and viability of a business. They scrutinize financial projections, revenue models, cost structures, and profitability potential. Startups need to present realistic and well-supported financial forecasts that align with the growth trajectory of the business.

Most of the deal flow comes from the VCs' networks in some form or another. Over 30% of deals are generated through professional networks. Another 20% are referred by other investors while 8% are referred by existing portfolio companies. Almost 30% are proactively self-generated.

VC multiples measure the ratio of the total value of the portfolio (including realized and unrealized exits, net of fees) to the total capital invested by the fund. IRR measures the annualized compound return of the fund or portfolio, taking into account the timing and size of cash flows.

Venture capitalist jobs are in high demand and surprisingly, not many people take up the role as it is a high-risk job. On average, these jobs require 50-60 hours of work where they assist in finalizing deals, negotiating, managing existing deals, and assisting in Initial Public Offering (IPO) proceedings.

How Are Venture Capitalists Compensated? Venture capitalists make money from the carried interest of their investments, as well as management fees. Most VC firms collect about 20% of the profits from the private equity fund, while the rest goes to their limited partners.

Venture capitalists (VCs) gather applications from companies that are seeking funding. This stream of investment opportunities is called deal flow. The higher the deal flow, the more likely that the VC can fund promising ventures. These applications are reviewed and some of the companies are invited to submit a pitch.

25-30% of VC-backed startups still fail

As a general rule of thumb for startups, out of every 10, about three or four fail completely. The other three or four return their original VC investments, and only one or two will produce substantial returns.

How much of my portfolio should be in venture capital? ›

In their white paper researcher Brian Moretta found that investors with normal risk profiles (equity:bond portfolios that are between 60:40 and 80:20), who add an appropriate proportion of venture capital (10-20%) can add 0.5-1% to expected annual returns without increasing overall portfolio risk, even without any tax ...

Entrepreneurs should be able to communicate their ideas and overcome the risks to nurture their business. That's exactly what venture capitalists are looking for. They need a founder who can rightly fit into their expectations of excellence.

In fact, venture capital industry insiders sometimes refer to the 2:6:2 rule. This rule is that an average portfolio of ten investments will include two losses (e.g., companies go bankrupt), six moderately performing companies (may break even on the investment or lose a little), and two very successful returns.

At its most basic, the two and twenty is basically the standard fee structure for venture capital firms to charge their investors. The 2% is the annual fee that the fund charges investors to manage the fund. And the 20% is the percentage of the upside that the fund managers take.

But it's important to understand how the math works here — and how it figures into how much to raise. My simple advice when you raise capital: assume you have to return a liquidity event (sale or IPO) of at least 10x the amount you raise for raising venture capital to be worth it.