Advanced Managerial Finance Spring 2013

Venture Capital It refers to the capital provided to early stage, high potential, high risk, growth startup firms. It’s used for new companies that are too small (1) to raise capital in the public markets, or (2) secure a bank loan, or (3) complete a debt offering. In exchange, the venture capitalist receives (1) significant returns, (2) significant control, and (3) significant ownership. Visit

Venture Capital VC statistics Stages of Development: Angel investors: investors who invest their own money as opposed to VCs who manage the pooled money of others. Angel investor money is between $250,000 and $1,000,000 Seed: funds are used for (1) product development, (2) market research, (3) building a management team, and (4) and developing a business plan. Seed stage VCs will likely participate in future investment rounds.

Venture Capital Stages of Development (continuation): Early stage: for companies that are begin operations but are not at the level of commercial manufacturing and sales. Startup: VC supports (1) product development and (2) initial marketing. Companies may see their first revenues but have not yet show a profit. First stage: companies have < 3 years in business. They have a product or service in testing or pilot production, product may be commercially available. Capital is used to initiate commercial manufacturing and sales.

Venture Capital Stages of Development (continuation): Formative stage: financing includes seed stage and early stage. Later stage: capital is provided after commercial manufacturing and sales but before IPO. Companies show significant sales growth, but may or may not show a profit. Third stage: capital provided for (1) expansion of physical plant, (2) product improvement, and (3) marketing Expansion: mezzanine financing: it finances the step of going public.

Venture Capital Mezzanine financing: a hybrid of debt and equity financing. A way for companies to obtain a loan w/o collateral and w/o creating additional stockholders. It’s risky for the lender because it is subordinate to all except common stock. It gives the lender the right to convert to an ownership or equity interest if the loan is not repaid in tome and in full. Think preferred stock Series A: it refers to a company's first significant round of VC. It consists of preferred stock sold to investors in exchange for their investment. It is usually the first series of stock after the common stock and common stock options issued to company founders, employees, friends and family, angel investors, etc.

Venture Capital NPV A VC is planning to invest in a nanotechnology startup. It is expected that the startup will have a 0.5, 0.4, 0.4, and 0.1 probabilities of failure in the first four years, respectively. If it’s successful the payoff will be $2M. For the risk taken, the discount rate is 30 percent, how much is the VC willing to invest today?

Venture Capital NPV An VC can invest $2 million in a new project that will last five years and will pay $18 million. His cost of equity for this project is 14%. He also knows that the project could fail at any time and has given the following percentages for the failure rate as follows: Year 1: 35%, Year 2: 30%, Year 3: 25%, Year 4: 20%, Year 5: 20% Should the VC accept or reject the project?

Venture Capital How entrepreneurs think about price/valuation vs. how VCs think about price/valuation? Pre-money valuation: it refers to the valuation of a company or asset prior to a new round of investment or financing. VCs and angel investors use a pre-money valuation to determine how much equity to demand in return for their cash injection to an entrepreneur and his or her startup company. = Post-money valuation – new investment

Venture Capital How entrepreneurs think about price/valuation vs. how VCs think about price/valuation? Post-money valuation: is the value of a company after an investment has been made = new investment x (total post investment shares outstanding/shares issued for new investment)