Informal Risk Capital & Venture Capital

Financing the Business

Stages for Financing

Early-stage financing

Development-stage financing

Seed capital Start-up financing Second stage Third stage Fourth stage

Acquisition-financing

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

Acid Test Ratio

(Current Assets-Inventory)/ Current Liabilities

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

Debt-to-Equity Ratio

Total Debt/ Total Equity

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 Similar to Earnings Approach

Factor 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

Investors 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