Chapter 12: Informal Risk Capital, Venture Capital, and Going Public

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Chapter 12: Informal Risk Capital, Venture Capital, and Going Public ENTR 452 Chapter 12: Informal Risk Capital, Venture Capital, and Going Public

FINANCING THE BUSINESS Criteria for evaluating appropriateness of financing alternatives: Amount and timing of funds required. Projected company sales and growth. Three types of funding: Early stage financing. Development financing. Acquisition financing.

TABLE 12.1 - STAGES OF BUS. DEVELOPMENT FUNDING

FINANCING THE BUSINESS Risk capital markets provide debt and equity to nonsecure financing situations. Types of risk capital markets: Informal risk capital market. Venture-capital market. Public-equity market. All three can be a source of funds for stage-one financing. However, public-equity market is available only for high-potential ventures.

INFORMAL RISK CAPITAL It consists of a virtually invisible group of wealthy investors (business angels). Investments range between $10,000 to $500,000. Provides funding, especially in start-up (first-stage) financing. Contains the largest pool of risk capital in the United States.

VENTURE CAPITAL Nature of Venture Capital A long-term (5-year) investment frame. Money come from pooled money (equity pool). Found in: Creation of early-stage companies. Expansion and revitalization of businesses. Financing of leveraged buyouts of existing divisions of major corporations or privately owned businesses. Venture capitalist takes an equity participation in each of the investments.

FIGURE 12.1 - TYPES OF VENTURE-CAPITAL FIRMS

FIGURE 12.4 – RISK/RETURN EXPECTATIONS FOR VC FIRMS

VENTURE CAPITAL Venture-capital process can be broken down into four primary stages: Stage I: Preliminary screening – Initial evaluation of the deal. Stage II: Agreement on principal terms - Between entrepreneur and venture capitalist. Stage II: Due diligence - Stage of deal evaluation. Stage IV: Final approval - Document showing the final terms of the deal.

VENTURE CAPITAL Locating Venture Capitalists Venture capitalists tend to specialize either geographically by industry or by size and type of investment. Entrepreneur should approach only those that may have an interest in the investment opportunity. Most venture capital firms belong to the National Venture Capital Association.

VALUING YOUR COMPANY Factors in Valuation Nature and history of business. Economic outlook- general and industry. Comparative data. Book (net) value. Future earning capacity. Dividend-paying capacity. Assessment of goodwill/intangibles. Previous sale of stock. Market value of similar companies’ stock.

VALUING YOUR COMPANY Ratio Analysis Serves as a measure of financial strengths and weaknesses of the venture but should be used with caution. It is typically used on actual financial results. Provides a sense of where problems exist in the pro forma statements.

VALUING YOUR COMPANY

VALUING YOUR COMPANY

VALUING YOUR COMPANY

VALUING YOUR COMPANY

VALUING YOUR COMPANY General Valuation Approaches Assessment of comparable publicly held companies and the prices of these companies’ securities. Present value of future cash flow. Replacement value. Book value. Earnings approach. Factor approach. Liquidation value.

DEAL STRUCTURE Terms of the transaction between the entrepreneur and the funding source. Needs of the funding sources: Rate of return required. Timing and form of return. Amount of control desired. Perception of risks. Entrepreneur’s needs: Degree and mechanisms of control. Amount of financing needed. Goals for the particular firm.

GOING PUBLIC Selling some part of the company by registering with the Securities and Exchange Commission (SEC). Resulting capital infusion provides the company with: Financial resources. A relatively liquid investment vehicle. Company consequently gains: Greater access to capital markets in the future. A more objective picture of the public’s perception of the value of the business. NOTE: DO NOT HAVE TO KNOW DETAILS FOR EXAM)

TABLE 12.8 - ADVANTAGES AND DISADVANTAGES OF GOING PUBLIC