Webinar

Masterclass Live! Math of VC

Expo Ventures Webinar with MP

Join us for an on-demand presentation about the math behind venture capital, led by Expo Ventures’ Managing Partner Alim Giga. Expo Ventures is Alumni Ventures’ USC-focused venture capital fund, and this webinar is open to all alumni and friends of USC.

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Post Webinar Summary

In this webinar, Ali Giga, a partner at Expo Ventures, presented insights on venture capital and its benefits for investors. He explained how venture capital enables investment in transformative early-stage companies, offering the potential for substantial long-term returns. Ali highlighted venture capital’s strong historical performance compared to public markets and its low correlation, which adds valuable diversification. He outlined the venture investment stages—angel, seed, early, and growth—and illustrated how portfolio diversification is critical for offsetting high risk. Through the Alumni Ventures network, Expo Ventures co-invests alongside top VC firms, building diversified portfolios across stages, sectors, and geographies for individual USC-aligned investors. Investors in Expo Ventures also gain optional access to syndication opportunities, allowing them to increase exposure to select individual companies. He concluded by encouraging interested investors to connect with Expo Ventures, highlighting the upcoming first close deadline for fee discounts.

Venture capital is the practice of investing in innovative, fast-growing private companies that are believed to have long-term equity appreciation potential. The work involves numerous calculations, from performing due diligence, calculating risks and returns, and bigger-picture calculations of the market.

During this session, we will discuss:

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    What is venture capital
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    The benefits of investing in venture capital
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    What are the risks and potential returns of venture capital
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    How the math of venture capital works
About Alumni Ventures

Note: You must be accredited to invest in venture capital. Important disclosure information can be found at av-funds.com/disclosures

Frequently Asked Questions

FAQ
  • Speaker 1:
    Hello everyone and welcome. My name is Alim Giga. I’m a partner at Expo Ventures and I’d like to welcome you to today’s webinar on the math behind venture capital. Thanks for taking the time to join me today. 

    Before we get started, I want to get some of the legal stuff out of the way with our disclosure statements. This presentation is for informational purposes only and is not an offer to buy or sell securities, which are only made pursuant to the formal offering documents for the fund. Please review important disclosures in the materials provided for the webinar, which you can access at avfunds.com/disclosures.

    Finally, a few housekeeping reminders. You won’t be on camera and we’ll be muting everyone throughout the entire presentation. We’re recording today’s webinar and afterwards we’ll follow up by email with a link to the recording as well as a link to our Fund Three data room where you can review additional materials about the fund. If you have questions, you can enter those in the chat box and we’ll follow up with you after the call.

    On today’s agenda, we’ll begin with a refresher on the basics of venture capital—why people invest in venture capital, why institutions particularly invest in venture capital, why companies fail or succeed in venture capital, and some of the variety of outcomes that you can see in this industry with portfolio scenarios. I’ll also provide background on Expo Ventures and Alumni Ventures’ approach to venture capital portfolios for individual investors.

    Just to give you a few words about me, I’m Alim, a partner on the team. Before joining Expo, I worked at American Express Ventures and GE Ventures focused on enterprise B2B, FinTech, and AI investments. Prior to investing, I worked in tech at Google managing a $100 million book of business, working with large-tier advertisers, helping them grow their online business. I also spent time at Instart Logic, a startup backed by Andreessen and Kleiner Perkins where I focused on business development and partnerships. The company was acquired by Akamai.

    My connection to USC is from my double bachelor degrees from Marshall School of Business and Leventhal School of Accounting, which is where I first became interested in the startup entrepreneurial ecosystem. I’m excited to be a part of the Expo team and cultivate a strong portfolio from the USC network. I also have a great team of investing professionals working with me at Expo as well as across our network of other alumni funds, and I’ll touch more on how Alumni Ventures operates later in this webinar.

    So what exactly is venture capital? I think the simplest and most encompassing description of it is that investing in venture capital is about investing in the future. If you look at these six very well-known names—Apple, Microsoft, Facebook, Google, Amazon, and Uber—the fact is that back in the earliest days when those companies were nothing more than someone’s bright idea and maybe a few demos, there was a venture capital financial backer that provided the risk capital to each of these companies to make it possible for them to get started. That’s fundamentally what venture capital firms do. We invest in companies at an early stage to change the future. That’s the crux of it. It’s about building companies that have the potential to grow massively.

    So why invest in venture capital? I would boil this down to two primary reasons. One is performance. Obviously, with a financial product, the goal is to make money, and that’s what venture capital has historically done very well. This is a chart of the internal rate of return comparing average venture capital performance versus the Russell 2000 and MSCI world indices in the same period. What you can see is over the 3, 5, 15, and 25-year periods ending in September 2023, the venture capital asset class as a whole, represented here by the green bars, has outperformed these metrics in all of these time spans.

    This is a big part of why institutional investors have historically allocated some portion of their assets into venture capital—because the performance can be exceptional. But there’s also another very important reason to consider investing in the venture capital asset class, which is to add diversification to your portfolio.

    What we’re illustrating here is that venture is not entirely correlated with other asset classes. That is to say, venture tends to move out of step with equities—stocks like those in the S&P 500 or the Nasdaq—meaning that volatility in the stock market tomorrow or next week is not really going to have a material impact in the short term on the venture capital market so long as historic trends continue.

    As a result, institutional investors have seen venture capital as another asset class that is different from and acts differently than the public markets. And a large part of this is because, of course, venture capital is a very long-term asset. So what happens today may not have an impact on our portfolio companies because we are really investing for returns five to ten years out on the horizon.

    So now let’s talk about some of the specifics of venture capital investing. In any asset class, there are different stages at which investments get made. I’m going to loosely describe how we and others in venture think about the various stages of investment. And I’ll also note, none of these are hard and fast definitions. These are just guidelines and can vary a bit over time, especially the valuation numbers that you are seeing we’re describing.

    So at the very early stages of building companies, you’ll see what we call angel investing. This is, in essence, a case where there are two people in a garage or a single founder with an idea. There’s effectively nothing else there. It is the very beginning of trying to do something and create a new business. The most common investors in that case are really friends and family—people who believe in the individual and are supporting them in trying to build something.

    This is not an area where Expo Ventures invests and is generally not considered part of professional venture capital. By virtue of being so early, it’s a very high-risk environment where you see a lot of surprises and a lot of failures.

    Moving into more professional venture capital areas, we talk in general terms about seed stage, early stage, and growth stage investment buckets. Seed stage is where you see companies that may have some early revenue, some early customers, and may be still trying to figure out their product-market fit. Valuations for companies at this stage are usually less than $20–25 million, and this is often where you start seeing venture capital funds involved.

    The next definitional segment is early stage. We tend to identify these as companies that are raising their Series A or Series B rounds of investment. This is typically where the company is generating some revenue and the real question becomes: how quickly can this company grow? Can they grow from selling to a few dozen customers to hundreds of customers?

    The last phase is what we describe as growth, which is commonly understood as Series C, D, E, and F and all the way down the alphabet. These are usually full-scale companies. They typically have revenues that are in the tens of millions. The question at this point is: where are they going next? Are they going to be acquired? Are they going to go public? How will they continue to grow as entities? At this point, you also have a wider variety of investors—venture certainly, but also you start seeing hedge funds, private equity, and institutional capital investing at this stage of the lifecycle.

    I think it’s very important to appreciate that what these companies are trying to do is fundamentally extraordinary and exceptionally difficult. If you think about a company going from nothing—just an idea—to what could be tens or hundreds of millions of dollars of value in five to ten years, that’s exceptional. Taking that risk also means that not all, in fact, many of them are not going to survive.

    Many companies will fail, but there will be some that succeed and produce extraordinary returns as investments. Roughly speaking, about two-thirds of them are probably not going to make it. Those are tough odds, but that’s a reality. When companies try to do something extraordinary, some of them will not succeed for any number of different reasons.

    I’ll highlight here the time chart from zero to 10+ years on that path. Typically, in roughly year five and beyond, you’ll begin seeing some of the companies in your portfolio be successful. It may be the case that a larger business is coming along and acquiring the company for their capabilities, or it may be a case where the company is successful enough that it can actually go directly into the public markets. But these success outcomes always take time to develop. So as an investor, you need to have patience for these winners to emerge.

    I’ll provide a couple of examples of this process at work, a couple that will be very familiar to you. One is Uber. The simple story here is that early investors in Uber did exceedingly well—to the tune of 5,000 times their invested capital. That’s a truly extraordinary result.

    As an example of the process at work, Shawn Fanning, who may be a familiar name to some, was one of the founders of Napster. He invested about $25,000 very early in Uber’s development. According to a Wall Street Journal analysis, presuming he held it, the value of that investment would be about $124 million. That is the enormity of what is possible in extreme cases. But I do want to offer just a quick caveat here: Uber is one of the most exceptional venture capital investments in history. Obviously, not all venture investments will have this kind of massive result.

    Another example is Airbnb. Their story starts in the 2008 timeframe when the company was worth effectively nothing. It’s also actually a great story of how the entrepreneurs made it through the early stages of the company’s development. In the early days, they didn’t have a lot of venture money. They didn’t have a lot of revenue. Yet the founders of Airbnb literally sold repackaged cereal during the year’s election in order to pay off credit card debt that had accumulated while trying to build Airbnb in the early days. It’s amazing, and that’s the kind of stuff that founders do all the time.

    What you see as we continue down the graph here from 2008 to the 2010 Series A—that’s where a lot of the venture capital money starts to pour in. And then gradually, over time, you get to 2014 and they were really on a rocket ship ride at that point.

    But it’s worth highlighting—in venture capital, it’s not always a linear ride to the end. You can see in 2020 when COVID happened, there was a significant down round. This is the case where the company had raised capital at increasing valuations, but because of COVID, suddenly things changed, and so they raised a new round of capital at a pretty substantial decrease in valuation. It turned out to be a momentary blip, and they continued to succeed and actually very quickly accelerated to an IPO valuation of more than $40 billion.

    So now let’s put that in the context of a venture investment portfolio. I’m going to illustrate a couple of different scenarios. There are, of course, an infinite number of scenarios, but I’ll illustrate a couple of scenarios of what a portfolio of venture investments and returns could look like.

    The first example is a case where an investor is investing 250,000 and we’re going to say that’s after fees just to simplify the math into 25 companies. So that’s roughly 10,000 per investment, hence the 25 blue dots here. So fast forward 10 to 12 years and what has happened in this scenario, what we see is that 22 of those companies didn’t survive. In a rather extreme case, they went to zero, but three companies returned five times their money, so they each returned 50,000 in total. Unfortunately, in this portfolio example, you see a case here where venture capital was not returned to the investor. That’s an unacceptable and disappointing return resulting in the investor losing a hundred thousand dollars, but this is where portfolio diversification becomes important because studies indicate that the likelihood of not returning capital from a diversified portfolio is less than 15%. So while it’s certainly possible to have a scenario like this, the likelihood is not that significant.

    That said, it’s important to recognize that in venture capital there is definitely risk, but I’ll talk through another scenario which is a bit different. The setup is the same. The investor puts in 250,000 for the same 25 portfolio company investments at 10,000 each. We fast forward 10 to 15 years, and what we see in this example is that 10 companies have failed outright, returning zero. 10 companies have returned the original invested capital, so no new money was made, but they at least returned the capital. But in this example, we see five companies have returned 20 times their money. As a result, from a monetary perspective, the fund profits are roughly a four times return of money. Now, this is before the profits are shared with the fund manager, which I’ll get to in a moment. Still, you’re seeing a significant profit on that original investment. Again, this is only one scenario. There are lots of different scenarios, but what I really want to highlight in these examples is that in venture capital, we’re not expecting all 25 companies to provide performance. We are more often than not expecting just a handful of companies to generate most, if not all, of the profits and make up for any of the losses. That is why we call venture capital a power law asset class. That is, just a few investments in a portfolio are expected to provide the bulk of the returns within any given fund.

    Now, the next dimension is time, and with respect to time, the saying we’re highlighting here is an important one to have in mind in venture capital—that lemons, that is the duds, ripen early, but the pearls take longer. What you see in this graph is a depiction of the overall performance of a fund across its 10-year fund life. In the first three to five years, what you’re seeing is the companies that don’t make it, the companies that for whatever reason don’t succeed. Those are our lemons, and we tend to see them quite early in the fund lifecycle. But in the background, hidden from view, are the pearls. We start to see early indications of their success, but it might take six, eight or 10 years before we actually know that is going to be a pearl. That time horizon requires patience and can be frustrating. But to be clear, that is the reality of investing in big, bold ideas that require time to come to fruition, sometimes well into the future.

    So one of the questions we sometimes get is, why don’t I just invest in IPOs and just don’t worry about private company investing? While there was a time when that would have been entirely an appropriate approach, we think that time has changed. What we have here in this chart is a few examples of the return multiples for some well-known US tech companies. If you look historically at the value created in public versus private markets for these companies, you’ll grasp that there’s been a major shift in the amount of value being captured in private markets versus public markets. So taking an example, if you bought Microsoft at the IPO and you just held it, you would see that the return multiples were substantial. But if you look at some of the largest tech success stories of the last decade or so, you can see that the bulk of the value creation occurred while the company was still private. These companies were already very mature by the time they got to the public markets. This is a fundamental change that occurred over this period because there are now more capital sources to support venture capital-backed businesses later into the development, so they don’t need to go to the public markets for expansion capital. That’s why we think it’s important for investors to have access to the venture capital asset class so that they have an opportunity to participate in some of the private market value creation.

    Let’s move on to some of the mechanics of how investors and funds make money. This is pretty straightforward. Investors make money in venture capital when any one of their portfolio companies has an exit. Say the company gets acquired or goes public, that’s the moment at which an investor will start to get paid. Funds make money in two ways. One is an annual management fee, so this is a fee against the investor’s capital. It’s the percentage which pays for the operating expenses of the fund. So this enables us to run the fund for what we anticipate to be 10 years plus. The second dimension is a share of profits, also known as the manager’s carried interest. So once the fund has begun generating profits for investors, then investors and the fund split those profits, and it’s the carried interest in the fund that is the shared upside. That’s the major incentive for fund managers to seek out and make great investments on behalf of the fund investors.

    So is venture capital right or wrong for you? I think there’s a few questions. I would certainly say the starting point here is that you should consult your professional financial advisor. It’s always going to be an appropriate thing and important to walk through it with them. A few questions worth contemplating are: first, would your portfolio benefit from diversification beyond the stock market, bonds, and real estate, which is the classic mixture for many individual investors? If you think there’s something incremental that could be valuable, maybe venture capital could be that piece. Second, is your portfolio—and are you in particular—comfortable with what is a fundamentally longer-term commitment and also an asset that isn’t liquid? Once we’ve invested funds into an individual company, we can’t trade in and out of that asset on a day-to-day basis the same way you can with public markets, so that may not be a fit for everybody. Third, does this fit with your personal risk tolerance? That is to say, will you be comfortable if there is some turbulence in the portfolio? We anticipate there will be bumps along the way as the winners separate from losers in the portfolio. So it’s important that you understand and can tolerate this over the life of the fund.

    So now I’m going to shift gears to talk about Expo Ventures and provide some background on Alumni Ventures. We’re currently raising our third Expo Ventures fund. Expo Ventures provides accredited investors with an opportunity to invest alongside fellow USC alumni and friends in a portfolio of 20 to 30 diversified investments in venture-backed startups, many with a connection back to the USC network. We’ll apply the same strategy of leveraging the network of our SC-focused team as through our 30-plus siblings at Alumni Ventures. We are proud to be fundamentally democratizing access to venture capital by helping individual accredited investors gain access to the venture asset class. Alumni Ventures started in 2014, and in 10 years we’ve grown to become the nation’s largest venture firm for individual investors with more than 1.3 billion raised to date, and we are one of the most active venture funds in the U.S. You’ll hear us talk a lot about being a network-powered venture capital firm. Our core networks are around alumni communities, and the one we are serving here at Expo Ventures revolves around USC, and we’re proud that today we can count more than 6,000 alums as part of the greater Expo community.

    Just a few more words on the size and power of the network we’ve assembled here at Alumni Ventures. First, of course, are our investors across our alumni communities, which today is more than 10,000. They’re part of the larger community of more than 750,000 people who are engaged with us, who are following what we are doing, who are easy to tap and eager to help by contributing valuable ideas and connections to our portfolio companies—whether it’s for intros, talent acquisition, other networking, you name it. This community engagement is at the heart of our network-powered model, and we work hard to create great resources for our 1,400 portfolio company CEOs to help them leverage our community for their success. Making all that happen are more than 120 full-time staff, over 40 of which are investment professionals, all working on your behalf to source and close great venture deals. Those staff are located in key venture hubs in the U.S., and we’re very collaborative. We work together, we do diligence together, and we invest together. We have access to the wisdom and experience across multiple sectors across all of our different teams.

    A core part of our investing model across all of our network is that we co-invest alongside other venture capitalists. We don’t lead rounds, we don’t take board seats, and we are not negotiating terms with entrepreneurs. We are a pure co-investor, and we co-invest with well-established firms. We care a lot about the lead firm’s expertise at the stage and in the sector in which we are investing, and we look closely at the syndicates formed around the deals. It’s a key part of our decision-making process, and these are just some examples of funds we’ve invested with in the past. You’ll see here a lot of names that I’m sure you’ll recognize as well-established firms in the industry including Sequoia, Kleiner, NEA, but of course there are many others.

    Our portfolio building strategy has been the same since Fund One and will continue to be the same for Fund Three. That is, we build in every fund a portfolio that is diversified across sector, stage, and geography. In terms of stage diversification, we typically try to invest roughly 65 to 70% of the primary capital of each fund into seed stage and early stage companies. As you might expect, we tend to see more failures in this early bucket, but these are actually the companies where you also have the potential to deliver outsized returns. On the other hand, with growth stage companies, the risk goes down a bit because you’re coming in at a later stage when there’s more data around the company performance. That’s especially true for our seed and early stage companies that move on to later rounds because we have a lot of confidence in them. 

    Those are our winners, and we can continue to invest our reserve funds in them. That said, the returns from growth may not be as outsized as the early stage investments. We’re trying to optimize the risk and return of the portfolio. We also invest across sectors, especially ones with high innovation like AI, machine learning, enterprise SaaS, health tech, robotics, FinTech, blockchain, clean tech, and others—companies that are potentially paradigm-shifting businesses. We also diversify across geography, so just because we’re a USC fund based in California doesn’t mean that we’re only investing in California companies. We do deals across the U.S. and even look at international deals in places like Latin America, Europe, and Asia.

    In addition to getting a diversified portfolio of quality venture investments, one of the other great benefits of being an Expo Ventures investor is that you gain access to what we call syndications. These are deals where we’ve secured an additional allocation and can offer that additional amount to our community as a way for members to invest additional dollars in an individual deal. These deals are vetted by our deal team, our investment committee, and at least one other Alumni Ventures fund. You have access to our diligence materials, our scoring methodology, and you can listen to a recording of our investment committee meeting to support your decision process. You get to decide if you want to invest in these individual companies on your own, and it’s completely optional. You can think of it as an opportunity to take an active hand in managing your own venture portfolio by selectively increasing your exposure to deals that you find attractive. And we’ve highlighted here just a few examples of syndications at Alumni Ventures that proved to be very popular with our investors. Companies like Koala, a digital pet prescription company; Yassir, a super app in North Africa; and Xanadu, a quantum computing company.

    Okay, I want to respect your time today. So with that, I’ll conclude this webinar and close by just reminding you that if you are interested in investing in Expo Ventures, we love to hear from you. There is a fee discount for investors who commit by our first close deadline on October 31st, so please keep that date in mind. If you have any questions about the fund, please reach out to book a call with me or one of my senior partner colleagues who’ll be glad to speak with you about the details, and we also will follow up separately with those who left questions today in the chat. Thank you so much for your time and for your interest in Expo Ventures. I hope you have a great remainder of your day.

About your presenter

Alim Giga
Alim Giga

Partner, Spike Ventures

Alim is a Partner at Spike Ventures, AV’s fund for Stanford alums. Before joining AV, he worked at American Express Ventures and GE Ventures, focusing on enterprise, B2B, fintech and AI/ML investments. Prior to investing, Alim worked in tech at Google, where he generated revenue for advertisers and managed a $100M book of business. He also spent time at PayPal in product marketing and Instart Logic, a startup backed by a16z and KPCB, where he focused on business development and partnerships. He holds a BS in Business and Accounting from the University of Southern California where he graduated magna cum laude, an MS in Management Science & Engineering from Stanford University and an MBA from The Wharton School.

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