Chris Thoughts

From Zero to IPO to Exit Round-up

Posted on 28. Jan, 2009 by Chris in Career 101, VC/Start-Up

This post is a stream of the Career101 topics, for which understanding I believe is essential to some. So the illustrated example here floats,

In the start of a product life cycle, there would be a prototype of model being tested and incubated in the campus of Stanford near the famous Sands Hill Rd, where most VCs are located. The start-up process is hard. One out of thousands of prototypes might be proved with a good business model that can jump ahead to receive further Seed Investment (by angel investor) then Serial A-B (or fewer) VC/PE investment and progress to pre-IPO level (1-2 years before a public share offering).

A Private Equity (say Carlyle II Growth fund, Venture Capital as VC normally would not pay for a third party to conduct Due Diligence during the relatively early stage) would show up and say, hey, why not let us finance you before IPO to make everything look great? Without indepth knowledge of the firm at a glance, the PE would rely on a consulting firm (say LEK) for firm/industry wide analysis to ensure it is a good investment with at least 25% IRR; if the product happens to be a high-tech, or new energy type products that even an industrial consultant expert with a Ph.d from Princeton doesn’t know, some other guy from the industry might be hired to deal with this range of task in the future. So here value of an industry expert adds up. The same applies to VC and PE investment. In the meantime, a Big Four accounting firm (say KPMG) would collaborate with the consulting firm to do commercial analysis, while the law professionals deal with all legal things to make sure it does not violate any governmental laws, business law (SEC filing and etc) and ensure multiple parties are protected.

When everything work correctly in the previous stage, the PE/VC will be happy to sign a term sheet with the company (whether it be early stage or late stage, similar process. VC is a early cycle investment of PE anyway). Since this post serves as illustration only, for specific information on term sheet, please go to , the term sheet archives from Feld would help.

You may also have one question just now, where does the money of PE/VC come from and how can they raise that large sum of fund? The source of funding mainly from institutional investors, endowment fund and HNWIs (high net worth individual). Fund raising is about GPs’ wide reach with LPs, track record and multiple got from previous investments or industrial involvement. The way of pitching involves long and exhausting process. GPs raising fund from overseas institutions or other parties might have to fly across cities, Atlantic for the road show. GPs quality of contacts or GPs’ ability to arrange LPs meeting or individual talks is instrumental as well.

However, there are also some PEs/VCs with well-above industry average returm multiple that are always over-subscribed when it comes to fund raising. It really depends on the portion that the GPs are willing to assign to PE A, other than PE B, C, and D. By the way, FOF (Fund of Fund) is an investment vehicle that investment in PE/VC because you could say there are times when those happliy living HNWIs do not have time to look at the credentials of a PE/VC. So they just directly invest in FOF to let them deal with this. All are big-time business.

When the company matures, an investment bank (int’l or boutique local bank like China eCapital) will serve as “CFO” of the company to deal with institutional relationship (Road Show), and make them aware that the business of the “Company” is a great value for investment. Believing in that, the company will be under the spot light with a AAA rating for buy upon the public offering.

When the company go IPO, the CEO’s net-worth boosts, he sell his chunk of stocks (upon the lockup period) to another international group (synergy effect), say P&G, cashes out and happily live his life in the a beautiful countryside of China. The company then becomes a subsidiary of the larger buyer P&G. So the public see a new shampoo brand under P&G (assume P&G acquired the “Company” who specializes in Shampoo) out in the market yelling for sales. At this time, another party might believe they could do a better job than the “Company”, so they invent another kind of product to tackle the market demand.

The process goes on and on like this.

BTW, looking at the topic of the post, there is also a company called zero2ipo in China.

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