Slide 4: Why CVC?

1) We want to keep with the latest technologies and hence instead of having in house tech we
can rely on outside companies who expertise in their fields
2) By investing we will fill up the lack of a capability to build business competency around a
certain area
3) We can also challenge our M&A acumen and the ability to manage risks by investing a small
amount in emerging start ups.

Slide 5: Venture capital firms need talent that is daring, willing to deal with huge losses and failures.
They also need talent that is good at seeing through the large promises venture entrepreneurs make
and foreseeing what technological trends will shape the future. Corporate employees may not be
able to bring such skills to the table

Slide 6: We will run the CVC as an independent subsidiary with its own CEO. This will ensure a
degree of independence that will lead to more autonomy for venture capitalist professionals as well
as less resource intensive involvement from the main business. As such, the main business will not
have to divert it’s focus too much. The result is a win-win for all parties involved. Venture
entrepreneurs can be assured that there will not be too much intervention from the Corporate. The
CVC can focus on investing for financial returns without having to bend too much to the will of the
Corporation’s will and politics. Meanwhile, the main business is not adversely affected by a lack of
focus.

Slide 7: The General Manager of the fund will report to the Fund CEO. When creating the Investment
Committee, there are generally two choices: it can consist of top executives at the Corporation
which will result in more strategic alignment, or it can be fully independent which will result in more
financial success (Hill et al., 2009). We suggest a hybrid of these two options for optimum results.
The investment committee will be overseen by the board of directors of the Corporation.

 The CVC will function as an LLC with the partnership with other VCs as limited partners so that they
can bring in the expertise of market trends.

 Staffing the CVC with venture capitalists leads to higher likelihood of financial results, staffing with
corporate employees leads to higher likelihood of absorption by the corporate but leads to
conservative decision making (Dushnitsky & Shapira, 2010). We thus seek to strike an optimum
balance between these two options.

Proper collaboration in the right way is important to ensure that all parties (Corporate, CVC and the
ventures) can have a win-win situation despite having different aims. The Corporate wants to invest
in ventures that will allow it to survive, get ideas for new technologies and find companies it can
someday acquire. Meanwhile these seem to be the last thing many start-ups want. Generally, start-
ups are distrustful of corporates and wary of their technologies being appropriated. They are also
not keen on corporate interventions that will force a more conservative or bureaucratic approach.
Slide 8: Investment Charter:

Once the structure is in place, the investment committee will work with the management team to
develop the investment charter, which will be approved by the organization’s BOD. The charter
would enlist how big would the fund be, the potential areas of investment, which would involve the
size of the company and which stage are we investing in and how each one would benefit IS Tech
Solutions, how the fund and the core business would interact, essentially the exit strategies and how
big are we willing to move ahead in areas of innovation.

Slide 10: Historically, 80%–90% of startup investments fail. While traditional VCs typically care solely
about financial outcomes, we have additional strategic returns to track. In other words, successful
CVCs can speak to their return on innovation, not just their return on investment.

Strategic Indicators:

1) Number of deals sourced with the lowest possible cost and the best possible returns
2) Understanding the EBITDA and the amount of cash it has generated for the organization
3) Number of in-house business units that have engaged with the portfolio companies to
provide support
4) Know how transferred from the portfolio companies to the parent company

Slide 11: Financial Indicators:

1) Evaluate how each investment has faired well in comparison with other investments
2) Understand the annual growth rate in terms of time value of money and the total growth in
terms of money invested right from the time it was invested till we got it back
3) How much has the revenue increased for the main business since money has been invested
in the startups and vice versa.

Slide 12: Multiples and Returns

Multiples and Returns are meaningless until the 5th or 6th year where it could be indicative of the
final metrics.

Distributions to Paid-In-Capital is a measure of how much money did the fund return to its parent
company compared to the capital paid by the same.

Residual Value to Paid-In-Capital is a measure of the value of the fund’s unrealized investments not
exited yet compared to the capital paid by LPs.

Total Value to Paid-In-Capital is a measure that combines both above measure, i.e., it’s a measure of
how much wealth did the fund generate for its LPs both distributed and remaining.

IRR: Internal Rate of Return

Multiples don’t consider the time value of money, that’s why LPs need more metrics to evaluate a
fund’s performance. Internal Rate of Return (IRR) complements multiples and give a more accurate
measure of how good a fund was.

Slide 13: Incentive Scheme:

14% of the fund’s profits (the carry) will be distributed among partners (and some times principals)
in the firm. For example if the fund invested 200 million and it got back 450 million, the capital gain
on this transaction would e 250 million. The carried interest would be 14% of 250 million = 35
million.

Slide 14: Partner Vesting - Vesting depends on the seniority of the partner and the investment term
(4–5 years) of the fund, not the total fund term (8–10 years). Vesting can be “cliff-vesting” or “back-
end loaded vesting” or in some case can have “accelerated vesting” terms.

Partner’s Capital Contributions - LPs contribute 1–2% of the total fund size at closing (signing capital
commitments). Partners who can pay this amount would usually fund this obligation (which is totally
fine because they will get it back + profits by the end of the fund’s term / as if they are LPs)

Management Fee - The 2.5% of the fund’s capital that’s paid annually to the management company
is usually used to cover salaries and other firm expenses.

Slide 16: Rotational programs allow for corporate employees to work on short-term basis as
contractors for the start-up ventures, offering their skill and industry expertise while continuing to
receive the corporate’s attractive benefits and renumeration. At the same time, the corporate
employee gets to experience a different environment at a role where they can perhaps take more
responsibility and autonomy in the small start-up than in their previous large corporate team. The
perks are great for both parties in that the corporate gets to have internal staff at the start-up
making due-dilligence risks lower and also enhancing the relationship between the Corporate and
the start-up which may be beneficial in case a future acquisition is planned. Meanwhile the start-up
gets access to top talent without needing to foot the cost of attracting and retaining such talent (in
the form of benefits and compensation). It must be noted that this structure would be suspicious to
the managers at the start-up if the Corporate was a direct competitor (due to the concern of
intellectual property theft), hence, this strategy is most feasible with ventures that offer a
complementary product or service to the Corporate.