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Foreword xiii Preface xvii Acknowledgments xxix PART ONE: Raising the Venture Fund 1 CHAPTER 1: The Universe of Limited Partners 5 An Overview of Alternative Assets 6 Sources of Capital 10 Comparison of Limited Partnerships 29 Summary 29 CHAPTER 2: Fund Due Diligence 33 Sourcing and First Screens 34 Fund Due Diligence: How LPs Evaluate Venture Firms 36 Evaluating the Fund Managers 39 Emerging Managers: A Promise of the Future 53 The Quest for the Elusive Top Quartile Managers 61 Fund Investment Strategy 67 Market Timing 77 Fund Size and Portfolio Construction vis-a-vis Fund Strategy 80 Fit within the LP's Current Portfolio 85 Why LPs Terminate Existing Relationships 87 Summary 87 CHAPTER 3: Terms of Investment: The Limited Partnership Agreement 89 Sample Terms in a Fund's PPM 90 Other LP-GP Terms 105 What Matters Most 110 Summary 110 CHAPTER 4: Fund Structure, Governance, and Operations 113 Key Constituents of the GP Team 114 Finding Suitable Partners 125 Fund Governance and Economics 126 Governance of Management Services GP LLC 127 Summary 134 CHAPTER 5: Getting to the First Close 135 Build Your Target List of Investors 137 Fund Marketing Materials 141 Presentation Slides 142 Making the Presentation Pitch: Drink Your Own Kool-Aid 144 Attracting the Lead Investor: Your "Nut" 144 Communicate, Create, and Maintain Momentum 146 Offering Sweeteners to Attract LP s : A Double-Edged Sword 147 The Role of Placement Agents in Fund-Raising 147 Caveat Emptor 151 Summary 152 PART TWO: The Investment Process 153 CHAPTER 6: The Art of Sourcing Investment Opportunities 155 The Best Source: The Network 157 The Fountainheads of Academia and Research 160 Corporate Research 161 Venture Events and Trade Conferences 163 Venture Farming 165 Angels and Pledge Funds 167 Business Plan Competitions 171 Cold Calling 172 You Win Some, You Miss Some 172 Summary 174 CHAPTER 7: The Art of Conducting Due Diligence 177 What Is Important: Jockey, Horse, or Markets? 178 Attributes of the Jockey 179 Serial Entrepreneurs versus First-Time Entrepreneurs 183 What about Charisma? 184 Management Team Due Diligence: How to Assess the Jockey 185 The Importance of Conducting Background Investigations 192 Assessing the Market 194 Evaluating the Idea or Product 199 Reviewing the Business Model 201 Considering the Financial Projections 202 Weighing the Importance of Business Plans 203 The Due Diligence Checklist 203 Summary 206 CHAPTER 8: The Basics of Corporations, Ownership, and Control 209 Authorized Shares and Issued Shares 211 Shareholder Rights 217 Role of the Board 217 Summary 218 CHAPTER 9: Valuation Methods and Other Voodoo Arts 219 The Drivers of Valuation 220 The Simplified Form of the VC Method of Valuation 221 Comparable Valuations of Similar Investments (Comps) 224 Discounted Cash Flow Method 226 Summary 228 CHAPTER 10: Structuring Investment Transactions 229 The Spirit of the Term Sheet 229 Negotiation Stress Points 230 Milestone-Based Financing: Risk Mitigation or Distraction 238 Structuring Terms to Generate Target Returns 239 Governance and Control: Protecting Your Securities 246 Exit-Related Provisions 247 Other Terms 248 Toward a Simpler Term Sheet for Smaller Investments 250 Syndicating Investments 251 The Closing Process: After the Term Sheet 252 Summary 253 CHAPTER 11: Behind Every Successful CEO Stand a Few Good Board VCs 255 The Need for Director Education 256 Roles and Responsibilities of a Board Member 257 Board Composition and Orientation 261 Board Practices 263 Get That Gavel: Overview of Robert's Rules of Order 265 Value Creation: How to Support Your Portfolio Company's CEO 268 The CEO's Perspective on Venture Capitalist Value Add 269 Setting the Tone through Board Culture 275 Improving the Board Game 284 Summary 289 CHAPTER 12: Exit Strategies 291 Preconditions for an Exit 292 Acquisitions: The Primary Path to an Exit 297 The Sell Process 302 When an Acquirer Comes Knocking 307 The Buy-Side Acquisition Process 307 Deal Killers 310 Acquisition Case Study: Mint.com Generates 5x Cash-on-Cash Return in Two Years 310 Initial Public Offering 313 Private Exchanges: Necessity Drives Liquidity Solutions 324 Summary 327 CHAPTER 13: Summing Up 329 Aptitudes and Attitudes of Successful Practitioners 330 Drawbacks 338 What about Luck? 339 Key Takeaways for Practitioners 340 As You Go Forward 344 About the Companion Web Site 345 Notes 347 Suggested Reading 375 About the Author 379 Index 381
MAHENDRA RAMSINGHANI manages Invest Detroit's First Step Fund, a seed and early stage fund with investments in over twenty-five start-ups. He led the development and launch of legislation for two fund-of-fund programs for the state of Michigan. The author has over fifteen years of experience with development of early stage companies and venture investments in the United States, Singapore, and India.