Cramdown

  

As in a "cramdown round."

You raised a ton of money at a suuuper high valuation for your psychic brain reader LADAR system (laser plus radar). Instead of making customers psychic, it grew them more hair. Unfortunately, the hair grew in, um, not-necessarily-desirable places.

So you're working on figuring out how to get the thing to grow hair on the head. And that $30 million you raised on a B round valuation of $70 million? Yeah. It's almost all used up, and your next round will be a desperation-money-raise. Your previous investors will be "crammed down" in their valuation, as will your percentage ownership as founder when the new valuation is $40 million with $15 million of new cash going into the company.

Take it or leave it. Hairy problem.

Related or Semi-related Video

Finance: What is Venture Capital?755 Views

00:00

finance a la shmoop- what is venture capital? Google Facebook Yahoo Netflix

00:08

LinkedIn snapchat Instagram well they were all originally funded by venture [logos flash across screen]

00:14

capital. and the common theme was that two college dropouts built these

00:18

companies starting in a garage in Silicon Valley, creating something

00:21

dot-com that would change the world. and the world's a mess so it needs a lot of

00:26

changing. venture capital comes in a few flavors-

00:28

the earliest rounds are called seed capital, and it usually mean that an

00:33

original investor put in a few hundred grand, maybe a million or two .the money

00:37

was invested at the very beginning of a company when it usually has no revenues [seed capital defined]

00:41

no product no nothing. just a hope and a dream and a big idea .and the idea can be

00:46

huge. at one point Yahoo's original seed

00:49

investment returns 10,000 times its original capital. a regular seed level

00:54

investors are called angels and they are typically previously

00:58

successful founders or entrepreneurs who want to recycle precious high risk

01:02

capital back into the Silicon Valley ecosystem in that form. and yeah Angels [man holding money looks excited]

01:07

know that 99 plus percent of their investments go fully bankrupt, but a few

01:11

become lottery ticket winners which produce massive returns and those

01:15

returns make up for the many many many losses. well once a company has say a

01:19

million bucks in revenue and has likely burned through the original seed money

01:24

million-ish or so that they raised, well they would then seek to take in what's [money burns in a fire]

01:28

called an a round. ie a first level full venture capital round where the company

01:33

raises four or five million dollars to then bring it to the next level of

01:37

growth. either in product use or revenues or depth and power of its patents or

01:42

intellectual properties and so on. anyway later stages of venture capital

01:46

investment are cleverly tagged B C and D rounds. and when a company is in the tens

01:52

of millions of revenues looking at a hundred million around the corner well

01:56

they would raise what is called growth capital- if they're no longer a [people peek around a corner]

02:00

speculative venture and they then appeal to a lower risk lower reward group of

02:04

investors. so where does the venture capital money come from? well the initial

02:09

seed amounts are relatively tiny. a pocket of 50 million dollars might fun

02:13

a hundred early startup companies for years and in the scheme of all the

02:17

wealth and Silicon Valley well 50 million bucks is just lunch money. a

02:21

normal sized venture capital fund might have half a dozen partners and another [business people smile at each other]

02:25

half a dozen junior partners .it would raise money from what is called limited

02:29

partners and that has nothing to do with the department store. the people

02:33

responsible for investing the money diligently are called the general

02:37

partners, and for this pleasure the general partners charge roughly 2% a

02:42

year in management fees and then they also take a 20 to 30 percent success fee

02:47

or carry if their fund pays back all of its initial capital and then has real

02:52

profits. so for a normal-size venture capital fund now let's say there's just

02:56

four general partners if they raise four hundred million dollars, invest it well

03:00

and in say eight years they've produced maybe a dozen IPOs and they've sold [graph showing growth]

03:05

maybe a half a dozen other companies so that the 400 million originally raised

03:09

has now turned into 2.4 billion dollars well they would show a profit of 2

03:15

billion bucks, and if their carry was 25 percent then the partners would split

03:20

five hundred million dollars among the four of them. and they'd get that all in

03:24

addition to the nice fat salaries they were taking along the way, so yeah it's a

03:28

nice work if you can get it and then there's the other side of the street as

03:31

an entrepreneur, if you're looking to start any sort of major venture you'll

03:35

need to attract some venture capital unless you know you and your buddy in

03:39

the garage have a couple mil just lying around with nothing better to do. [two people sit behind computer screens]

Up Next

Finance: What are Five Questions You Can Expect to be Asked in a Venture Capital Investing Interview?
10 Views

What are Five Questions You Can Expect to be Asked in a Venture Capital Investing Interview? Why are you doing this? What DO you know? What do you...

Find other enlightening terms in Shmoop Finance Genius Bar(f)