1. Informal Risk Capital, Venture Capital, and Going Public
Chapter 12
Informal Risk Capital, Venture Capital,
and
Going Public
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Financing the Business
Criteria for evaluating financing alternatives:
Amount and timing of funds required
Projected company sales and growth

3. Table 12.1 - Stages of Business Development Funding

4. Financing the Business
Risk capital markets:
Provide debt and equity to nonsecure financing situations
Types of risk capital markets
Informal risk capital market: Consists mainly of individuals (business angels)
Venture-capital market: Consists of formal firms
Public-equity market: Consists of publicly owned stocks of companies

5. Informal Risk Capital Business angels
Individuals: educated, experienced in startups, expect to play an active role in your venture
Investments range: $10,000 to $500,000
Provides first-stage financing (<5 year old firms)

6. Table 12.2 - Characteristics of Informal Investors

7. Venture Capital Market
Venture capital firms
Invest in:
Long-term capital appreciation via debt and equity
Early-stage, expansion/revitalization, leveraged buyouts
Decision criteria:
Strong management team
Unique product and/or market opportunity
Significant capital appreciation
Process:
Preliminary screening, principal terms, due diligence, final deal

8. Figure 12.4 - Venture-Capital Financing: Risk and Return Criteria

9. Valuing Your Company General valuation approaches
Present value of future cash flow: Valuing a company based on its future sales and profits
Replacement value: Cost of replacing all assets of a company
Book value: Indicated worth of the assets of a company
Earnings approach: Determining the worth of a company by looking at its present and future earnings
Factor approach: Using the major aspects of a company to determine its worth
Liquidation value: Worth of a company if everything was sold today

10. Valuing Your Company
General valuation method

11. Valuing Your Company Nonmonetary aspects that affect valuation
Nature and history of business
Economic outlook
Dividend-paying capacity
Assessment of goodwill/intangibles
Previous sale of equity
Market value of similar companies’ stock
Financial ratio: measure financial strengths and weaknesses of the venture

12. Valuing Your Company
Liquidity ratios
Activity ratios

13. Valuing Your Company
Leverage ratios
Profitability ratios

14. Deal Structure Investors care about: Entrepreneurs care about:
Rate of return
Timing and form of return
Amount of control desired
Perception of risks
Entrepreneurs care about:
Degree and mechanisms of control
Amount of financing needed
Goals for the particular firm

15. Going Public
Selling some part of the company by registering with the Securities and Exchange Commission (SEC)
Provides the company with:
Financial resources
A relatively liquid investment vehicle
Initial public offering:The first public registration and sale of a company’s stock

16. Table 12.8 - Advantages and Disadvantages of Going Public