Informal Risk Capital & Venture Capital
Financing the Business
Stages for Financing
Early-stage financing Development-stage financing
Seed capital Start-up financing
Acquisition-financing
Second stage Third stage Fourth stage
Traditional acquisitions Leveraged buyouts Public-equity
Risk-Capital Markets
Informal risk capital Venture-capital market Public equity
Informal Risk & Capital Markets
Business angels Usually start-up Hard to calculate exact size
Characteristics
Industries Investment size Time frame Finding them
Venture Capital
Nature of Venture Capital
Definition General partners Limited partners Length of investment
Overview of Venture Capital
1946- American Research and Development Corporation
1958- Small Business Investment Act
1960s= 585 SBICs Today= 360
Late 1960s- Private Venture Capital Firms
Today=980
Overview of Venture Capital
Corporations State-sponsored Venture Capital University-sponsored Venture Capital Characteristics
Size Industries Stages of business being funded Geographic location
VC Process
What do venture capitalists want?
Basic Goal Trusting relationship with entrepreneur Business criteria
Strong management team Unique Product/MKT Opportunity Good ROI
Early-stage v. late-stage
VC Process
Portfolio establishment Four stages
Preliminary
Evaluate business plan Background information
Agreement on principal terms Due diligence
Longest stage Detail-oriented
Final approval
VC Process
Where to find venture capitalists?
Member lists Referrals Call to check specialization Send plan and short letter General rules
Approaching venture capitalists
Valuing the Company
Eight Factors
Nature and History of Venture Economy and Finances from Business Book Value and Overall Financial Conditions Future Earnings Capacity Dividend-paying Capacity Goodwill and Intangible Assets Any Previous Stock Sales Market Price of Stocks in Same Industry
Ratio Analysis
Liquidity Ratios
Current Ratio
Current Assets/ Current Liabilities (Current Assets-Inventory)/ Current Liabilities
Acid Test Ratio
Activity Ratios
Average Collection Period
Accounts Receivable/ Average Daily Sales Net Profit/ Total Assets
Inventory Turnover
Ratio Analysis
Leverage Ratios
Debt Ratio
Total Liability/ Total Assets Total Debt/ Total Equity
Debt-to-Equity Ratio
Profitability Ratios
Net Profit Margins
Net Profit/ Net Sales Net Profit/ Total Assets
Return on Investment
General Valuation Approaches
Comparable Publicly-Held Companies Present Value of Future Cash Flows Replacement Value Book Value
Adjust book value (depreciation, unsellable intangible assets, fair market value)
General Valuation Approaches
Earnings Approach
Weighing recent years’ earnings after adjusting for extraordinary
Factor Approach
Similar to Earnings Approach
Weight earnings, dividend-paying capacity, book value
Liquidation Value
Lowest value
General Valuation Method
($ of VC Investment) * (VC investment multiple) VC Ownership % = (Projected Profits in 5 years)* (P/E multiple of comparable company) (Earnings) * (Earnings Multiple) Present Value= (1+i)^n Initial Funding Present Value
Investor’s share=
Valuation
Internet Companies
Due Diligence
Market Finances Management Team
Deal Structure
Venture Capitalist needs:
Entrepreneur needs:
Rate of return Timing and form of return Amount of control Perception of risk
Control Amount of funding Goals