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VENTURE CAPITAL

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					VENTURE CAPITAL

 IMPORTANT SOURCE OF
EQUITY FOR HIGH GROWTH
      COMPANIES
• “POOL OF CAPITAL, TYPICALLY
  ORGANIZED AS A LIMITED
  PARTNERSHIP, WHICH INVESTS IN
  COMPANIES THAT REPRESENT AN
  OPPORTUNITY FOR A HIGH RATE OF
  RETURN WITHIN 5-7 YEARS.”
                          Venture Capital Funds

Year          number of funds       Funds($Bill)   New Funds
              funds

       1990          82                    3.1           13
       1995         155                    9.7           44
       2000         494                   92.6          162
          BACKGROUND
• VENTURE CAPITAL FIRM BACKED
  FIRMS RESPONSIBLE FOR

 –   3.3% OF NATION’S JOBS
 –   7.4% OF GROSS DOMESTIC PRODUCT
 –   ALL FOR ONLY 1% OF NATION INVEST.
 –   “GAZELLES” (>20% GROWTH) ARE 5%
     OF NATION’S FIRMS; 2/3 NEW JOBS
BIG CHANGE IN FINANCING
• GROWING WEALTH/DISPOSABLE
  INCOME
• VERY VISIBLE HIGH TECH
  COMPANIES - poster children for feast-or-
  famine nature of venture capital
• RECENT SURVEY - 6/100 of high tech
  startups had traditional bank debt as first-
  round financing
 VENTURE CAPITAL ROLES

• PURCHASE EQUITY OR HYBRID
  SECURITIES

• ASSIST IN NEW PRODUCT
  DEVELOPMENT

• FOCUS ON HIGHER RISK-RETURN
  COMPANIES
SAMPLE FIRMS THAT USED
   VENTURE CAPITAL
• FEDERAL EXPRESS

• COMPAQ

• SUN MICROSYSTEMS

• INTEL

• MICROSOFT
  VARIABLE TRAITS OF
 VENTURE CAPITAL FUND
• RISK

• LENGTH OF COMMITMENT

• INVESTMENT ILLIQUIDITY

• MINIMUM $ COMMITMENT
    STRATEGY OF V.C. FIRM
        P. 283 OF TEXT
•   MANAGEMENT ABILITY
•   WELL-DEFINED NICHE BUSINESS
•   LEADING MARKET POSITION
•   STRONG GROWTH POTENTIAL
•   CONSOLIDATION
•   RISK AVOIDANCE
•   REASONABLE SELLING PRICE
        EXIT OPTION 1

• MERGER/ACQUISTION

 – MOST FREQUENT EXIT
 – AT LEAST 3-5 YEARS AFTER INITIAL
   INVESTMENT
        EXIT OPTION 2

• INITIAL PUBLIC OFFERING (IPO)

  – MOST GLAMOROUS

  – FUND GETS PUBLIC SHARES BUT OFTEN
    MAY NOT BE TRADED FOR UP TO 2
    YEARS
      WHAT INDUSTRIES
    ATTRACT VENTURE CAP.
•   Poised for rapid growth/high profit
•   Sustainable growth in excess of 5 years
•   Niche or emerging markets
•   market large enough to support in range of
    $100 million in company value
    – health care
    – information technology (?)
  LIFE CYCLE OPTIONS FOR
      V.C. INVESTMENT
• SEED INVESTING - before the real
  product or company is organized
  – $300-3 million


• EARLY STAGE INVESTING - after first
  product development
  – $3 million - $20 million
       V.C. CYCLE CONT.
• EXPANSION STAGE - beyond critical
  mass toward more successful firm
  – $20 MILLION-$100 MILLION
  – STAGE AT WHICH IPO OR FIRM BUYOUT
    EXPECTED
• LATER STAGE - also through exit via
  stock offering or buyout
    EVALUATION APPROACH
• Uniqueness of product
• Will company become profitable?
• How will proceeds be used?
• Management able and willing to meet
  specific goals?
• Is there an exit strategy for equity investors?
 VALUATION APPROACHES
• EARLY STAGE FIRMS - focus on
  management

• EXPANSION STAGE FIRMS - value =
  multiple of revenues

• LATE STAGE FIRMS - MULTIPLE OF
  EARNINGS
 CASE STUDY VALUATIONS
• HOP-IN-FOODS - P. 259-260

• BERG ELECTRONICS - P. 281

• Q: COMPARE IPO FIRMS WITH FIRMS
  IN SAME INDUSTRY

				
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posted:10/31/2011
language:English
pages:17