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Chapter

12

Informal Risk Capital And Venture Capital

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Financing The Business

EarlyEarly-Stage Financing
SeedSeed- Prove Concepts/Feasibility Start-UpStart-Up- Develop Initial Products For Commercial Sales

Expansion/Development FundingFunding- Support Initial Growth Acquisition Financing (LBOs)

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RiskRisk-Capital Markets
InformalInformal-Risk Capital- Business CapitalAngels Who Are Individual Investors Venture Capital- Money Raised By CapitalVenture Capitalists To Invest, Equity Participation PublicPublic-Equity Markets
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Venture Capital Firms

Private Venture Capital- General & Limited CapitalPartners Small Business Investment Company (SBIC) Industry Sponsored:
Banks/Financial Institutions NonNon-Financial Companies

State Government Sponsored University Sponsored

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Venture Capitalists
1. Locating 2. Approaching- Select ApproachingRight One
A. Referred B. Introduction C. Dont Shop It D. Good Oral Presentation
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Venture Dollars Invested Per Deal

18 16 14 12 10 8 6 4 2 0 1994 1995 1996 1997 1998 1999 2000 2001 2002
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In $ Billions

Venture Investments Stage

In $ Millions

Startup/Seed

Earl Stage

Expansion

Later Stage
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Venture Capital Investment Criteria

 Strong Management Team  Product/Market Opportunity Unique  Have Significant Capital AppreciationAppreciation- 40 to 60%
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Venture Capital Process

1. Establish Philosophy & Investment Objectives 2. Stages
A. Preliminary Screening- Business ScreeningPlan B. Agreement on Principal Terms C. Due Diligence
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Company Valuation Factors

1) 2) ) 4) 5) 6) 7) 8) Economic Outlook- General & Industry OutlookComparative Data Book (Net) Value Future Earning Capacity DividendDividend-Paying Capacity Assess Goodwill/Intangibles Previous Sale Of Stock Market Value Of Similar Companies Stock
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Ratio Analysis- Liquidity Analysis-

Current Ratio
Current Assets Current Liabilities = 108,050 = 2.67 Times 40,500

Acid Test Ratio

Current Assets - Inventory

Current Liabilities

108,050 10,450

40,500

= 2.40 Times

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Ratio Analysis- Activity Analysis-

Average Collection Period

Accounts Receivable 46,000 = 995,000/ 60 = Average Daily Sales

17 Days

Inventory Turnover
Cost of Goods Sold = Inventory 645,000 = 61.7 Times 10,450
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Ratio Analysis- Leverage Analysis-

Debt Ratio
Total Liabilities Total Assets 249,700 = = 08,450

81%

Debt to Equity
Total Liabilities = Stockholders Equity 249,700 = 4.25 Times 58,750
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Ratio Analysis- Profitability Analysis-

Net Profit Margin

Net Profit Net Sales = 8,750 = 0.88% 995,000

Return on Investment
Net Profit Total Assets = 8,750 = 200,400

4.4 %

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General Valuation Approaches

Used To Determine Worth Of Company Present Value Of Future Cash FlowsFlowsBased On Future Sales & Profits Replacement Value- Cost Of Replacing ValueAssets Book Value- Net Balance Sheet Value Of ValueAssets EarningsEarnings- Based on Present & Future Earnings Factor Approach- Uses Earnings, Book ApproachValue & Dividend-Paying Capacity DividendLiquidation Value- Value If Everything ValueSold

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Venture Capital ValuationValuationBased on Required Return

VC $ Investment X VC Investment Multiple Desired Companys Projected Profit In Year 5 X PE Multiple of Similar Company

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Venture Capitalists Factors In Pricing A Deal

Return Amount of Money Now/Later Quality of Deal Quality of Team Amount Entrepreneur is Investing Companys Future Prospects Upside Potential Downside Risk Investment Collateral Liquidity Exit Strategy
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