Orchid Partners: Executive Summary Essay

Orchid Partners is a Venture Capital firm be founded by give commonplace abetter _or_ abettors Todd Krasnow, Susan Pravda, David garter, Bill Nelson and Jeff Flowers who give up known each(prenominal) separate for many years in various professional and ain capacities. All four colleagues are driven and committed to thisventure and mother the strength of prior experience in venture capital persistence, entrepreneurship, trading operations (hands-on running of businesses), raising capital to memory board ventures, familiarity with the the great unwashed making fulfill on either side of the table, as intimately experience in multiple industries. Moreover, their strengths are complementary such that they overcome various(prenominal) weaknesses eg.Friend prefers to be a visionary and rainmaker, while Krasnow has operational expertise and Susan holds the computer memory to sither. The timing and personal goals of the partners too align during the founding of Orchid. However, neither single(a) has experience world a general partner in a venture capital fund, and the group needs to work together cohesively and go down the outstrip strategy for the fund. Individual strengths and weaknesses are detailed below ringToddKrasnowSusanPravdaDavidFriendBill NelsonStrengthsExtensive experience and showing of retail operations and marketing in food-grocery, office supply and dry cleaning effort Proven leadership and entrepreneurship skills king to lead operations from conceptual to executional phase angle and drive growth across geographies with hands-on, analytical and unemotional get down undergo in raising money for entrepreneurship venturesNe bothrking skills along with ability to create and subscribe alliances with multiple firmsKnown for strategizing and negotiation skills along with legal prowessAbility to multitask while overseeing smooth functioning of firm managingoperations, budgeting, finance and compensation overbearing and great at t ime managementSuccessful entrepreneur and nonesuch investor in technology sector with chief executive officer experienceFundraising skills and great network. Sits on boards of companies Innovator, with varied interests and respected public figure, leading to network across level strata of societyVeteran with valuable operating expertise along with CEO experience across multiple companies in lifetimeReputation of beingness 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 negotiatorMain WeaknessPerceived as wild card with little techexperienceTaking on the partnership may be too much onher abodeWants to be rainmaker and visionary anddoesnt like to be involved in day to dayoperationsMarket savvy and ability to understand and foresee technology trends Well experienced entrepreneur having served as CTO of tercet companies Innovator and holder of patents in technology sectorJeff Flowers Due industry 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 people they believed may be interested in investing in their firm. Friend could get truenesss of $50,000 to $500,000, but that was miniscule in comparison to their sign target of $50 million. The major problems with this near were 1. During the first round of fundraising, it is delicate to convince individual investors of the viability of the deals 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 backward to invest since they do non have ample funds from other investors already. Also, individual investors typically invest smaller amounts as compared to larg er institutional investors.2. Also, Pravda, Krasnow and Flowers were non able to spend dedicated time to fundraising activities, since they were working wide time. Thus, initially, the effectiveness of fund-raising activities was limited by Friends activities alone. Once they accomplished 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 constitute of different segments, i.e. innovators, early on adopters, resistors (laggards). This had a huge implication on Orchids fund raising activities. It was essential for them to raise the initial few millions by means of institutional investors enough to reach critical mass, adjacent which the laggards and the other nescient investors follow into innovators footsteps. Thus, they should engage with fr iendly 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 applicable to the institutional investors. Thus, they decided to focus the pitch more on their join competencies.Deal SourcingThe lodge pouched with the assumption that other VCs would be an excellent parentage 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 sma ll funding. Friends from other VC companies would suggest the companies that do not fit their criteria or need small funding in serial A. Orchid partners felt that the approach was in their best interest considering that circumstance the market would not trust a new VC fund scratch line up easily and established limited partners might not stimulate a scene with such companies.Orchid Partners were following practices common for deal sourcing in the venture capital universe. Their strategies dealt with by focusing on semipermanent 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 background 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 the lead 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 enthronization. Inaddition, this model assumes that the partner would be able to analyse every aspect of the business i.e. taking into consideration the legal, financial, administrative and operative aspects of the business which might not evermore be feasible.Orchid Partners could build a specialist team adroit 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 from banks might also help in generating leads from financial institutions. relations with control PartnersIn 2003, the PE industry is just recovering from a downswing and the Early-stage investing part of the market is largely underserved. Also, the Orchid Partners team is well diversified and has strong 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 flavor at a fund term of at least 5-7 years which will 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. Management tiptoe Orchid Partners should look at management fee of 3% considering the circumstance 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.Hurdle 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 specialize of 2080 where-in they will keep 20% of the profits and share 80% ofthe profits to the LPs, once the Hurdle Rate has been met.Distribution falls 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 bu siness which is being exited.GPs contribution to the fund This is important 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 whittle in the game.