Work-Life Strategies & Solutions

On the Evolution of Work Systems in the Digital Economy

Exploring Evergreen Funds with a VC Investor Who Raised One

This post was written by Alex Graham, Finance Expert for Toptal.

Submitted by Michelle Young at Toptal

Edited by Lynn Patra

Executive Summary

What Are Open-ended and Evergreen Funds?
How Are These Funds Different from “Traditional” Funds?
What Is Some Advice from Someone Who Has Raised and Operated an Open-ended VC Fund?

 

Earlier in 2018, through Toptal, I worked with Rodrigo Sanchez Servitje from B37 Ventures on a project related to its open-ended VC fund. Such funds are still a relatively unknown and misunderstood type of funding vehicle, with a dearth of “in the trenches” information out there about how they operate. With this article, I am looking to correct that.

As someone who has raised and operated an open-ended VC fund, throughout the piece, I will refer to Rodrigo for invaluable insight regarding B37 Ventures’ experiences.

What Are Open-ended and Evergreen Funds?

In venture capital fundraising, as the adage goes, “If it ain’t broke, don’t fix it.” For years, funds have toed this line by raising capital through closed-ended vehicles. This refers to a management company raising a set amount from external investors via a limited partnership legal structure for a fixed number of years (typically ten). After this process, the doors close, money is put to work and, at the end date, the fund is wound up and repaid.

Despite investing in disruptive and innovative industries, the landscape of VC fund structures has largely remained unchanged.

The most obvious alternative would be the inverse of a closed-ended fund: an open-ended one. In these such funds, capital is invested directly into an LLC on an ongoing basis with no termination date. It is essentially investing preferred equity into a company. Investors buy units of a fund with a yield attached (the hurdle rate) and they can buy more, or sell, whenever they wish.

This type of fund is also liberally referred to as a permanent capital vehicle or evergreen fund. The ethos between the names is largely the same, in that it’s referring to structures with no end date or fixed capital quotas. A core distinction is that an evergreen fund can recycle returned capital while open-ended funds (like B37 Ventures) distribute to investors. Read more of this post

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Estimating WACC for Private Company Valuation: A Tutorial

This post was written by David Turney, Finance Expert for Toptal.

Submitted by Michelle Young at Toptal

Edited by Lynn Patra

Executive Summary

Common Roadblocks in Estimating Private Company Discount Rates and How to Overcome Them
Discount Rate Estimation of a Privately-Held Company – Quick Example
Why Would You Need a Discount Rate for Private Company Valuation?

Introduction

Nowadays, an increasing number of companies are opting to stay private for longer, bypassing regulations and public stakeholders. While the total number of US companies continues to grow, the number of those traded on stock exchanges has fallen 45% since peaking 20 years ago. As reported by The Economist in 2017, the number of publicly listed companies was 3,671, down from 7,322 in 1996. Thus, private company valuation has risen to the forefront, especially since it is required for anything from potential acquisitions to corporate restructuring and financial reporting. Understanding how discount rates are estimated and their role in financial decisions is important to both private business owners/operators and investors/valuation professionals. Unlike public company valuation, private company valuation often lacks publicly available data. However, both types of valuation have something in common: usage of the discounted cash flow (DCF) analysis, which requires (1) estimation of future cash flows and (2) a discount rate.

This article focuses on best practices for estimating private company discount rates, or the weighted average cost of capital (WACC), drawing on my 12 years of experience performing private company valuations and various editions of Cost of Capital: Applications and Examples. The discussion begins with an overview of the DCF analysis and the WACC, followed by detailed instruction around the components of the WACC. While this article will cover WACC as taught in accounting classes and the CFA program, it will also demonstrate how best to handle challenges encountered in practice. Perhaps unsurprisingly, a lot of classroom rules break down in the real world. And, since variables for estimating WACC are not simply pulled from a database, much analysis and judgment is required. Read more of this post

Risk vs. Reward: A Guide to Understanding Software Containers

The original post was written by Jonathan Bethune, Python Developer for Toptal.

Submitted by Michelle Young at Toptal

Edited by Lynn Patra

Those of us who are old enough can remember a day when software was delivered primarily by physical media. The spread of broadband internet and smartphones has led us to the age of the web service—software hosted in the cloud accessed by user clients such as browsers and apps.

Not too long ago, web applications were run directly on physical machines in private data centers. For ease of management, these applications were usually monolithic—a single large server would contain all of the back-end code and database. Now, web hosting services like Amazon and the spread of hypervisor technology have changed all of that. Thanks to Amazon Web Services (AWS) and tools like VirtualBox, it has become easy to package an entire OS in a single file.

Using services like EC2, it has become easy to package machine images and string together sets of virtual servers. Along came the microservices paradigm—an approach to software architecture wherein large monolithic apps are broken up into smaller focused services that do one thing well. In general, this approach allows for easier scaling and feature development as bottlenecks are quicker to find and system changes easier to isolate. Read more of this post

Advanced Financial Modeling Best Practices: Hacks for Intelligent, Error-Free Modeling

This post was written by Alberto Mihelcic Bazzana, Finance Expert for Toptal.

Submitted by Michelle Young at Toptal

Edited by Lynn Patra

Executive Summary

What Are Recommended Strategies for Building Financial Models?
The Top Tricks and Tips for User-Friendly, Smart, Error-Free Modeling
How Can a Finance Expert Help You/Your Company?

Introduction: A Financial Model

Financial models are an indispensable part of every company’s finance toolkit. They are spreadsheets that detail the historical financial data of a given business, forecast its future financial performance, and assess its risks and returns profile. Financial models are typically structured around the three financial statements of accounting—namely: income statementbalance sheet, and cash flow statement. The management of most corporations rely, at least in part, on the details, assumptions, and outputs of financial models, all of which are critical to said companies’ strategic and capital decision-making processes.

This article serves as a step-by-step guide for the novice and intermediate finance professional looking to follow expert best-practices when building financial models. For the advanced financial modeler, this article will also showcase a selection of expert-level tips and hacks to optimize time, output, and modeling effectiveness. Let’s begin. Read more of this post

Private Equity Succession Planning Do’s and Don’ts

Submitted by Michelle Young at Toptal

Authored by Melissa Lin, Finance Editor at Toptal

Edited by Lynn Patra

Executive Summary

Private Equity Succession Planning: Portfolio Companies
Don’ts in Private Equity Succession Planning for Portfolio Companies
Do’s in Private Equity Succession Planning for Portfolio Companies
Succession Planning for Private Equity Firms Themselves

Introduction

While growing investor enthusiasm has contributed to a flood of capital (a historic $3 trillion over the last five years), the private equity industry faces increasing competition among PE firms, record-high multiples, and other factors making it difficult for them to generate attractive returns. One aspect for consideration is succession planning, especially since CEO turnover at portfolio companies occurs at a rate of 73% and has been shown to increase hold time and decrease returns. While succession planning is undoubtedly important for the continuity and sustainability of any company, it may be even more true for those in the private equity industry.

This article defines succession planning and examines the best practices and mistakes to avoid in succession planning for PE portfolio companies (beyond just the CEO level). It also explores succession planning within private equity firms themselves, something PE firms have been uncharacteristically proactive about confronting recently.

What Is Succession Planning for Private Equity Portfolio Companies?

Read more of this post

Family Office Investment Guide: An Alternative to Venture Capital

This post was written by Vidur G. Gupta, Finance Expert for Toptal.

Submitted by Michelle Young at Toptal

Edited by Lynn Patra

Executive Summary

What Is a Family Office?
How Does Family Office Investing Differ from Venture Capital?
A Family Office Investment Could Be Right for You If…
How Can an Expert Prepare Your Company to Receive an Investment?

15th Century Florence…

Family offices began investing in early-stage ventures centuries ago. In 15th century Florence, the Medici family actively supported young artists by investing in their works (venture capital of its day), patronage which provided the start for some of the greatest masters of all time from Leonardo Da Vinci and Michelangelo to Galileo and Botticelli. Amazingly, this was 500 years before the first formal venture capital firm (ARDC) was founded.

…to Present Day

Read more of this post

Waking Up a Sleeping Industry: Mattress Industry Disruption

Submitted by Michelle Young at Toptal

Authored by Melissa Lin, Finance Editor at Toptal

Edited by Lynn Patra

Executive Summary

The Traditional Mattress Model
Upstarts Grabbing Market Share
Common Mattress Upstart Success Factors:
The Story Isn’t Black and White
Key Takeaways from Mattress Industry Disruption

Introduction

Mattresses are having a cultural moment. Once crammed into stuffy showrooms with eager salespeople and a dizzying plethora of models touting ergonomic springs or gel foams, mattress purchases have long been a notoriously complicated in-store purchase. However, they have recently become—dare I say it?—sexy. A growing number of upstarts have recently revitalized the industry with innovations in marketing, delivery, a direct-to-consumer model, and new mattress technology. According to Jason Bennett, former Senior Director of Marketing for Gap, Inc., “Mattresses are now a cool thing to talk about. You would never have thought that in years past.” You might be scratching your head wondering how regular mattresses—not even “smart” mattresses—have gained renewed popularity in the public eye, but wonder no more.

While the concept of “disruption” has become somewhat trite in today’s evolving tech world, it may just be that these mattress upstarts are shaking up the business and forcing incumbents to adapt. Rather than the typical narrative of shiny, nimble operations displacing older ones, perhaps there’s room for collaboration and innovation. There are lessons for investors, entrepreneurs, and corporate moguls alike. This article discusses the traditional mattress business model, what these upstarts are doing differently (and better), and some takeaways from these developments. Read more of this post

Design News – Innovation from Around the Globe

Submitted by Michelle Young at Toptal

Authored by Daniel Schwarz, Design Blog Editor at Toptal

Edited by Lynn Patra

 

March 2018

Fascinating Design News – Arriving Every Month

In this Toptal Design World News edition, we highlight four cutting-edge tools that promise to improve design productivity and collaboration. Plus, we bring reports of an improbable comeback in the making—the resurgence of skeuomorphic design.

We’ll also showcase a detailed UI design tutorial that Toptal designer Ruaridh Currie was hired to create for Digital Arts Magazine. Read more of this post

The Statistical Edge: Enhance Your Metrics with the Actuarial Valuation Method

Submitted by Michelle Young at Toptal

Authored by Dani Freidus, Finance Expert for Toptal

Edited by Lynn Patra

Executive Summary

What Is an Actuary?
The Power of the Actuarial Valuation Method
How Can an Actuary Help to Enhance Business Metrics?
How You Can Start to Implement This Now

Beyond Insurance: The Changing Role and Perception of Actuaries

I often hear the question “What is an actuary?” Well, actuaries are unique in that they have a deep understanding of both business and statistics. Traditionally, an actuary’s differentiator was their ability to make financial sense of extremely long-term horizons—typically those associated with the lifespan of human beings. This naturally lent itself to actuaries working in the age-old fields of life insurance and pensions

However, it is not just an actuary’s grasp of the long term which is unique but also their ability to harness a broad range of academic fields and apply them in a business context. To this end, the Actuaries Institute defines actuaries as professionals who: Read more of this post

Considerations for Raising Your Own Private Equity Fund

Submitted by Michelle Young at Toptal

Authored by Martin Kemeny, Finance Expert for Toptal

Edited by Lynn Patra

Executive Summary

Raising a private equity fund is a natural progression for ambitious investment managers.
The strategy and operations of a fund should be thoroughly planned in advance.
Be well aware in advance of the securities laws that must be adhered to.

There’s a time in many investment managers’ careers when the next logical step is starting a private investment fund on their own. Either the manager has been working for others as an employee and now wants to go solo, has been investing their own money and wants to raise outside capital, or has been investing with others’ capital on a one-off basis and wants to scale. Whatever the reason, in many cases, the right answer is to set up a fund. A fund can stabilize an investment business and help the manager grow assets under management and create a valuable investment platform.

Whether co-mingled or from a single investor, a fund has many distinct advantages over one-off capital raising: Read more of this post

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