Lecture 5 Entrepreneurship and Enterprise Dr Vijay Vyas

Understand 1. The nature of equity gap for small firms 2. Importance of venture capital 3. Difference between formal and informal venture capital 4. Process of venture finance 5. Requirements of venture capital companies 2/15

 Bank debt the usual option  Problems with bank debt ◦ Collateral ◦ Risk ◦ Short term ◦ Repayment pressure ◦ Impatient and uncommitted  Size: £50000 to £500,000 (Deakins and Freel, 2003) 3/15

4/15 SeedYoungGrowingMature Stock Market Institutional investors Retained Profits Venture capital Banks Informal investors Family/Friends Own Capital Stage Model of Finance

 Financial investment in companies which... ◦ are unquoted ◦ have significant growth potential ◦ promise substantial capital gains but ◦ are high risk investment 5/15

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7/15 Exit Prospective Investee Venture capitalist Investors Monitoring Structuring Evaluation Screening Deal origination Cold ContactsTechnology scans Referrals The venture capital process

8/15 Asymmetric Information Adverse Selection Moral Hazard

 Institutional venture capital (formal) Min £500,000; Average Over £1 million  Informal (business angels) ◦ Market? ◦ Competitive? ◦ Credible? ◦ Potential? ◦ Where money would be used?  Corporate venture capital  Public sector venture capital 9/15

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 Seed finance (proof of concept funding)  Start-up finance  Expansion finance  Replacement Capital  MBI/MBO 15/15

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