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How Venture Capital Works - YouTube
Channel: Alejandro Cremades
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hello everyone so today we're gonna be
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talking about venture capital firms so
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and how venture capital works so
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basically the idea really venture
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capital firms are the ones that are
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investing in startups for the most part
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on early-stage startups you see them
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starting to invest at seed rounds then
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they go to Series A Series B Series C
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and then you start having private equity
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firms really coming in so the main
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difference between the venture capital
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firms and the private equity firms is
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that the venture capital firms are
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investing in people while private equity
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firms are investing in the numbers now
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when it comes to the actual venture
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capital firm everything starts with the
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people all the way at the bottom so the
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people at the bottom really are the
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analysts so those are the guys the kind
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of people that are going to be crunching
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the numbers in the office that are gonna
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go to events that are going to be cold
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emailing founders and by the way if you
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receive a cold email from an analyst
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don't even respond because basically
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what's happening is that what the
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analyst is doing is reaching out to get
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information from the market specifically
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from the founders so that they're able
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to then retrieve all that information
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all that data and identify different
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players in the market and potentially
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the winner that the investment firm is
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going to be investing in so that's going
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to start with the analyst now the
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analyst they don't have any type of say
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or vote in the matter there are just
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crunching numbers and pushing paper now
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after the analyst what you're gonna
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encounter is the associate so the
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associates they start with the summer
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associates for example the people that
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are doing an MBA and for the summer they
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want to work at a venture firm and
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potentially become later on a full-time
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associate then you have the associates
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again you know like people that are just
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coming out of college or coming out of
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their MBA or maybe you know like a
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failed entrepreneur that has given the
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opportunity by that pond that invested
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in them to really come and work for them
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basically you know like the associates
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they're going to be scouring deals
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they're gonna go also to events and they
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are going to have the potential of
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opening you the door to the partners
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which ultimately are the ones making the
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decisions however the associates they
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don't have any
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in the matter and they're not going to
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be able to make any type of investment
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decision so do not waste your time so
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much with the associates now the other
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guys that are gonna be in between the
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associates and the partners are going to
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be the principals now the principals are
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those folks that may have a say in the
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matter are those individuals that are
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seasoned that have been working in
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venture capital for some time or maybe
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they have exited a business in the past
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and now they are working at the firm and
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they are helping with sourcing
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investments with doing the due diligence
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on some of those investments and then
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potentially have the opportunity to make
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decisions on some of those investments
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but for the most part principals do not
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have that much of a say when it comes to
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making the investment now outside of the
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principle what you're going to find is
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the partners now the partners come in
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different type of flavors the first one
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is gonna be in a normal partner so that
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partner is basically going to be that
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one that is going to be receiving that
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deal flow that is going to be involved
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in the socialising into the screening
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into the due diligence and also into the
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term sheet process as well as the
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verification of whatever statements that
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have been made from the founder which
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really is that you did the due diligence
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again even though the due diligence
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really happens all across the board from
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the minute that you step your foot in
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the firm the BC is going to start to
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really do the due diligence on you so
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basically with that being said the the
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partner really is going to be someone
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that at the beginning is going to be
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grabbing you if they like you they're
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going to be grabbing you into the firm
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putting you in touch with let's say like
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another partner so that they are they
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are already becoming your sponsor they
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are helping you with introducing you to
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other partners so that potentially the
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other partners are also ease into the
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idea of making an investment in you and
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then you know basically the partners you
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know they're gonna invite you for the
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partners meeting and then at that point
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you know they're gonna decide whether or
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not they make an investment in your
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business now the top partner is the
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managing partner the managing partner
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for the most part is the real head guy
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is also super involved when it comes to
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the operations in the business and also
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that managing
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partner is going to be involved when it
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comes to raising money for their fund
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and their font it's obviously raising
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money from their own investors with the
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venture capitals they call the limited
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partners or LPS now it's very important
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for you to understand how the venture
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capital firms make money so basically
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what it comes what it comes down to is
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that they make a 2% management fee a on
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average and a 20% carried interest so
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there's always a management fee on
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whatever assets that they're managing
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over the course of time let's say 5 or
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10 years and also they get the carried
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interest and the carried interest the
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way that it works let's say 20% is on
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whatever profit that they're able to
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generate for their own plants so for
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example let's take an example for
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example if if they've raised a hundred
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million dollar fund and let's say
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they've been able to do okay or they're
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they be doing very well with the fund
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and they made up to two hundred million
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between the amount raised and then also
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the profits that they generated from the
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startups that they were able to exit
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then basically what happens is that the
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first 100 million is returned to their
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investors to the limited partners and
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then from that remaining 100 million
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that they have made in profits what's
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gonna happen is that they're going to be
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taking the carried interest so in a case
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where they're making 20% carried
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interest on that extra 100 million on
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the profits they will be taking 20
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million themselves and then the other 80
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million is what they return back to
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their investors so they will be making
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money with that carried interest plus
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let's say if it's a hundred million
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dollar fund if they're making let's say
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2% management fee that's going to be in
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a yearly basis 2% on that and that is
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distributed amongst the partners of the
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firm so that in essence is the way that
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venture capital firms work and the way
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that you're going to be seeing the
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structure of all these different players
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again remember that the limited partners
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you know which are the ones that invest
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in the actual fund those do not have a
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say in the matter sometimes they may sit
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on the investment committees that some
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of these say venture firms have but for
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the most part the people that are making
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the decision are the partners and that's
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really the way that venture capital
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works so if you like this video please
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feel free to leave a comment
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like and in also subscribe so you can be
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alerted on future videos that we will be
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launching and then also don't forget to
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sign up and check out the fundraising
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training that you're gonna see on the
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link below where we help from A to Z
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founders in the journey of raising
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capital thank you so much for watching
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