Many startups are funded by venture capital funds. So, in this section, let's look at the venture capital fund. In series A, usually is convertible preferred stock. And preferred here means preference over common stock on dividends and liquidation. And we will talk about this liquidation later. Convertible means that these preferred shares can be converted into common stocks, so that they can enjoy the benefits of common stocks. Venture capital funds are set up with investment from funds like pension funds or companies and rich individuals. And the fund size is typically several tens of millions or several hundred millions of dollars. And a venture capital fund typically lasts for 10 years. And the compensation for venture capital fund is management fee of two percent of the total fund and performance fee of 20 percent that means if there are returns and then 80 percent will go to the source of the fund and 20 percent will be kept by the venture capitalist. The structure of a venture capital fund typically looks like this. Those who manage this fund is called general partner or GP and this fund is getting money from other funds, companies, and individuals, and these are called limited partners, LPs. And using this fund, the venture capital fund is investing on startups. Now, let's look at the score card of venture capital fund. Although it's relatively old data, it shows the typical performance of a venture capital fund. In this case, the total fund size was 100 million and the average investment size was $4 million. And this fund lasted for five years. Here are the performances. So, the companies with 60 percent of the invested money went bankrupt. So, there was no return from these investments. And 12 percent was barely break even. And another 10 percent of companies were sold cheap. And the other eight percent, although they survived, they are not suitable for IPO or exit. And six percent of their 100 million were successful with IPOs. And, in this case, the returns was $48 million and the return per year was 52 percent. And probably one company, four percent, was a great success; we often call this a home run, with a return of 40 times. And from this single case, the return was $160 million. The return percentage per year was over 100 percent. So, if you add up these numbers, then the investment money was at $100 million and the return was 2.5 times. So, return money was $245 million and this gives you the return percentage of 20 percent per year. So, it's a pretty good result. So, what can we tell from this? Even though venture capitalists were carefully analyzing the startups before they make decisions on investment, still many of them were not successful. So, eventually, a venture capital firm will depend on a few great successes; in this case, 10 percent of the total invested amount which went public. When venture capitalists decide on investment, they are looking for markets with large size and very fast growing speed; an idea or technology possible to commercialize and a business more with unfair advantage, which is often called the barrier to entry; and a good team, which can execute the business plan; and finally, of course, low stock price. So, this slide shows the cash flow of a venture capital fund. We already talked about the J curve. And a venture capital fund also shows J curve. So, initially, the venture capital fund is investing on various startups, and after several years, then it begins to harvest. It is in red bars and it is called the harvest period until the end of this lifetime of this fund. So, initial investment is within five years and the rest of the period is more for managing these invested portfolios and harvesting. So, from the scorecard of venture capital, we now know that venture capitalists rely on a small number of big successes. So, venture capitalists, when they decide on an investment, they target very high return like 10 to 20 times in series A.
