In this report, we have discussed in detail about the PVC team, their fund raising activities, deal sourcing strategies and deal terms with Limited Partners. 1. 1 Strengths: Rich Operating Experience: All the partners in the team came from operating backgrounds and had rich experience of starting and running successful companies. While Nelson came with the experience Of running a $1 billion firm, Todd Karakas and David Friend and Jeff Flowers were serial entrepreneurs and also had significant experience in executive positions.
This made this team a winner as the maturity and experience of the general ratters is an important factor in helping portfolio companies scale up. Complimentary Expertise: Venture Capital business is about finding and investing in companies that aim at using technology to disrupt industries. For this, it is important that general partners have strong expertise in at least one domain so that they can add value to the startups through their experience and contacts.
While David Friend brought his experience of starting successful technology companies, Nelson had experience of running publicly listed companies like On-Line Software and Susan Pravda brought her legal expertise to the team. Trust and Respect among Partners: All the partners had a deep respect for each other and deeply appreciated the achievements of each other. Apart from this, some had also great experience working with each other closely for a long time.
For example, William Nelson and David Friend had worked on many startups together. 1. 2 Weaknesses: No Previous Active Investing experience: All five people in the team came from operating backgrounds and did not have experience of being active investors in the venture capital industry. No Track Record: Entrepreneurs with retreat business ideas tend to partner with Vs. who have a successful track record. Not being part of any PVC firm earlier also meant that sourcing deals would be harder.
Difficulty in Raising Money: On the other side, not being from venture capital industry, the team had limited relationships with institutional partners evident by the fact that time and again they were faced with difficult questions from limited partners. 2. Orchid’s fund-raising activities and Limited Partners Orchid started fund raising in 2002 with a view of raising a $50 million fund to invest in early-stage ventures with a strong technology component. The initial strategy of Orchid Partners to raise capital was to review their personal Rolodex to find “friendly investors” and business contacts who had mutual interests. The 5 General Partners (I. E. Nelson, Flower, Pravda, Friend & Karakas) committed an average of $2 million each to get the fund started. The commitment was an average investment of approximately $500,000 per year by each GPO over the expected 4 year investing cycle. Additionally, Friend took the lead in contacting wealthy individuals (mainly entrepreneurs) whom he knew in order to get them on board as Limited Partners. Friend was successful in getting commitments of $ 50,000 to $500,000 from individuals, but he soon realized that raising $50 million In such small increments would be really difficult and time consuming.
Keeping in mind the challenges of raising a $50 million fund in such small increments, Orchid Partners should instead focus on institutional investors first as Limited Partners. Once they have raised first $30 – 540 Million from institutional investors such as Pension Funds, Endowments and Foundations, then they could top off the balance amount with investments from wealthy individuals. Orchid Partners decided to pursue this ‘institutions first’ strategy in addition to focusing on a few high- visibility individuals such as Tom Stromberg.
After interacting with institutional investors, Orchid Partners realized that the target of $50 Million was too small and they revised their target to $100 Million with a flexibility of increasing to $1 50 Million if investors wanted to take larger positions. They realized that this would make it easier for institutional investors to participate in the fund. Additionally, Orchid Partners was a long-term partnership with multiple fund opportunities and expected to be raising new funds every few years. They planned to start the fund raising process up again as soon as one fund was at least 50% invested.
Once the team began to earn the respect of some of its early-target investors, referrals began to open new doors for fund raising. In order to spread the risk & diversify their sources, Orchid Partners decided that no investor should have more than 20% investment of the total fund. The General Partners started raising money from institutional investors in April 2003 and expected to close the fund by June 2004. They raised capital UT didn’t have enough strong leads to reach the fund target of $100 Million and were thinking of closing the first round of the fund early at $75 Million.
Orchid Partners were trying to analyze the risk reward trade-off of closing the fund too soon. 3. Evaluation of Orchid’s proposed strategy towards deal sourcing Reaching out to other Funds and Contacts: At Orchid Partners, the partners together brought expertise in entrepreneurship, technology, operations and experience in executive positions. The partners sought to reach out to funds in which they had personal contacts, funds with a similar Ochs, and partnerships that had recently completed a round of fund-raising. They hoped to connect with general partners in these funds to gain both market and operational intelligence.
The Orchid partners also planned to reach out their business contacts from past business lives, friends of friends, and friendly investors who could help them with fund raising and presentation strategies, and for developing the portfolio companies of Orchid. Collaboration with funds and mitigation of risks/diversification: In addition to investing in new seed/entry-stage investment funds, Orchid team leaned to raise a fund to invest in the compelling “restart” opportunities. This would lead to diversification and thus mitigate the potential downside risks.
This would safeguard against the potential risk of any investor pulling out mid-deal. Finally, they also planned to collaborate with the other PVC funds which would enable them to get referrals from the other funds and help add to their business and mitigate the risk from competitors. 3 Deal Screening, Due Diligence and Unanimity in decision making: Orchid team had a longer term vision of generating substantial deal flow on their win because of their deep roots in the hardware, software, and retail and service business communities.
Once Orchid Partners had fund raising in place as proposed above, the orchid team then planned to screen the deals on their radar for potential investments and narrow down to the ones found to meet minimum entry requirements. C] Post screening the deals would be thoroughly analyses by the partners who specialize in that industry that firm is in. They would look at company’s and industry growth prospects and financial to ascertain if Orchid partners loud add significant value to the company. They also plan to ensure that there is a clear and potentially lucrative exit strategy in place.