Orchid Partners: Executive Summary Essay

orchid Partners is a Venture Capital firm creation founded by give general partners Todd Krasnow, Susan Pravda, David wiz, Bill Nelson and Jeff Flowers who soak up known each other for many old age in various professional and personal capacities. every four partners ar driven and committed to thisventure and bring the strength of prior examine in venture capital exertion, entrepreneurship, operations (hands-on running of businesses), nurture capital to store ventures, familiarity with the take making cognitive operation on either side of the table, as well experience in multiple industries. Moreover, their strengths are antonymous such(prenominal) that they overcome separate weaknesses eg. whiz prefers to be a Laputan and rainmaker, while Krasnow has operational expertness and Susan holds the fund together. The timing and personal goals of the partners as well align during the founding of orchidaceous plant. However, neither individual has experience being a gener al partner in a venture capital fund, and the group needs to play together cohesively and decide the best strategy for the fund. Individual strengths and weaknesses are detailed below NameToddKrasnowSusanPravdaDavidFriendBill NelsonStrengthsExtensive experience and understanding of retail operations and marketing in food-grocery, affair bring out and dry cleaning attention Proven leadership and entrepreneurship skillsAbility to lead operations from conceptual to executional do and drive growth across geographies with hands-on, analytical and unemotional approachExperienced in nurture cash for entrepreneurship venturesNetworking skills along with ability to create and sustain alliances with multiple firmsKnown for strategizing and negotiation skills along with legal artistic creationAbility to multitask while overseeing smooth functioning of firm managingoperations, budgeting, finance and compensationSystematic and great at time managementSuccessful entrepreneur and angel inv estor in technology sector with CEO experienceFundraising skills and great network. Sits on boards of companies innovator, with varied interests and respected public figure, leading to network across horizontal strata of high societyVeteran with valuable operating expertise along with CEO experience across multiple companies in lifetimeReputation of being turna cycles/second specialist with experience in operations and giving businesses a new lease of life with spectacular growthValuable network, since sits on boards of companies and educational institutesSkilled negotiantMain WeaknessPerceived as wild card with little techexperience victorious on the partnership may be excessively much onher plateWants to be rainmaker and visionary anddoesnt like to be involved in day to dayoperationsMarket turn over and ability to understand and foresee technology trends Well experienced entrepreneur having served as CTO of three companies Innovator and holder of patents in technology sector Jeff Flowers Due diligence expert for technology retreated aspects of VC firmsOrchids fund-raising activitiesEach of the general partners committed $2 million towards the fund. Initially, Orchid directed its fund-raising efforts towards personalcontacts of the partners, flush(p) people they believed may be interested in investing in their firm. Friend could get commitments of $50,000 to $500,000, exactly that was miniscule in comparison to their initial orchestrate of $50 million. The study problems with this approach were 1. During the first round of fundraising, it is difficult to convince individual investors of the viability of the contests the firm has in the pipeline and hence get their buy-inwithout having other investors. It leads to a cause and effect problem, where people are reluctant to invest since they do not have score funds from other investors already. Also, individual investors typically invest smaller touchstones as compared to larger institutional invest ors.2. Also, Pravda, Krasnow and Flowers were not able to spend dedicated time to fundraising activities, since they were working full time. Thus, initially, the effectiveness of fund-raising activities was limited by Friends activities alone. Once they realized that these initial efforts may not be so effective in raising the requisite amount, they decided to target institutional investors, raise a large chunk of the target amount and then approach individual investors for the remaining amount.Similar to other industries, VC fund investors also put forward of different segments, i.e. innovators, early adopters, resistors (laggards). This had a huge implication on Orchids fund raising activities. It was essential for them to raise the initial few millions through institutional investors enough to reach critical mass, succeeding(a) which the laggards and the other skeptical investors follow into innovators footsteps. Thus, they should engage with friendly institutional investors at first. This essentially meant two major changes in their fundraising strategy1. Revise the target upwards The initial target of $50 million was too small for them to sustain the fund through consecutive rounds of investing. Also, since institutional investors tend to invest in larger amounts (increments of $5-20 million), a larger fund would make it easier for them to participate.2. Revise the Pitch Their initial pitch was targeted at individual investors, and thus delved deep into the nuances of the VC market, which was not relevant to the institutional investors. Thus, they decided to focus the pitch more on their core competencies.Deal SourcingThe association get offed with the assumption that other VCs would be an excellent source of new deals. It believed that the expertise they had in varied sector and emerging technologies was not very common amongst VC circuit and they could pick up companies in the early stages of operation and needed small funding. Friends from other VC companies would suggest the companies that do not fit their criteria or need small funding in series A. Orchid partners felt that the approach was in their best interest considering that fact the market would not trust a new VC fund start up easily and established limited partners might not take a chance with such companies.Orchid Partners were following practices common for deal sourcing in the venture capital universe. Their strategies dealt with by focusing on long-term relationships built with sellers and management teams in the local region of New England. To start with, Orchids plan to leverage industry contacts of its partners and VCs to provide a pipeline of deals might be good in the short run. In future, as the size of the fund grows, sustaining a steady pipeline would be rather difficult.Orchid devised a strategy to concentrate only the areas that it was knew best since each partner had unique solid ground and was a specialist is their field. The approach was to assign a partner to every sector in which the company had expertise. The partner was then responsible for carrying out the due diligence and also comprehensive study of the industry and exit option of the firm. The issue with this approach is that the partner already has heavy involvement in the deal in advance pitching it to all the partners. Since the firm size was smalland every partner was an expert in their own field there is a chance that they could get too attached to their views and push for the investment. Inaddition, this model assumes that the partner would be able to analyse every aspect of the business i.e. taking into devotion the legal, financial, administrative and operative aspects of the business which might not always be feasible.Orchid Partners could build a specialist team trained in outbound origination programs who would be experts in scouring industry forums and the upcoming internet. Matching historical deal to the industries in focus with investment financing f rom banks might also help in generating leads from financial institutions. Dealing with Limited PartnersIn 2003, the PE industry is just recovering from a downturn and the Early-stage investing part of the market is largely underserved. Also, the Orchid Partners team is well diversified and has unfaltering experience with them w.r.t. growing, managing and turning-around businesses. However, since their fund is new and doing the first round of fundraising, they dont have the liberty of being too demanding from the Limited Partners in terms of the deal terms. It is advisable that they focus on the following deal terms Fund term The Partners should look at a fund term of at least 5-7 years which leave alone have an investment period of 3-4 years.They can start the negotiation with 7 years fund term and as a worst case look to close at 5. Since they are focusing on technology and technologyenabled businesses, a term of 5-7 years should be enough to close the fund. wariness fee Orchid Partners should look at management fee of 3% considering the fact that they are raising a small fund and they would need sufficient capital to hire a team, rent an office and cover other administrative costs. Post negotiation, they should look to keep this component at 2.5% at minimum. overleap rate Since the fund is new in the market, it will be advisable to offer preferential returns to the LPs before the GPs can carry a part of the profits with them. Orchid Partners should set this rate at 8%, the industry norm.Carry Orchid Partners should offer a straight, non-negotiable carry contract of 2080 where-in they will keep 20% of the profits and distribute 80% ofthe profits to the LPs, once the Hurdle Rate has been met. dispersion waterfall Orchid Partners should propose that the returns generated by exit from the investments will be distributed to the LPs in a pro-rata to amount of the LPs money invested in the business which is being exited.GPs contribution to the fund This is gra ve as it signals the commitment of the GPs to the fund and ensures incentive compatibility between the LPs and the GPs. They should invest at least 10% of the fund size to the fund to assure the LPs that the GPs have enough skin in the game.