module 7 venture capital
TRANSCRIPT
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Module 7
Informal risk capital and venture capital
Informal risk capital market
Venture capital - Nature and overview
Venture capital process Locating venture capitalists
Approaching venture capitalists
Funding Entrepreneurship Development 1
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A ventures typical life-cycle
Funding Entrepreneurship Development 2
Profit,Productivity,Revenues
New Venture Start-up Venture Growth Businessstabilisation
Innovation orDecline
Source and type of funding varies
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Why new ventures need funding
Cash Flow Challenges
Inventory must be
purchased
Employees must
be trained and
paid
Establishment
overheads
Advertising mustbe paid for
Funding Entrepreneurship Development 3
Capital Investments
Cost of buying real
estate, building
Purchasing
equipment
Technology
purchases
patent filing
Lengthy PDLC
Product
development can
take a long time
Funds required
during
development
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Stages of business development funding
Funding Entrepreneurship Development 4
Highest risk,Highest returnexpected
Lowest risk,Lowest returnexpected
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Informal risk capital market
Business Angels
Invest their personal capital directly in start-ups
High net worth ex-entrepreneurs, retired corporate
executives, professionals
$25K to $150K per start-up Apple received 91K from Mike Markkula (ex-Intel) in 1977.
When Apple went public in 1980, this investment was worth
$150M
Expect hefty 40%+ annual return Sit on the Board sometimes
Act as mentors and use their wide personal network
Remain anonymous
Funding Entrepreneurship Development 6
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Venture capital market
Funds made available for start-up firms and small businesseswith exceptional growth potential
Also known as venture capital, risk capital is provided to
companies in the early stage of development
It is a professionally managed pool of equity capital
Venture Capital Investments are private equity investments in
business ventures from growth stage through expansion of a
company already producing and selling a product and through
preparation for exit from the investment via buyout or initialpublic offering
They bring equity investment (and debt), financial planning,
business skills to the firm
Entrepreneurship Development 7Funding
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Public Equity market
Organized markets for trading in equity shares such
as common stocks, preferred stocks, and warrants.
Includes markets for both regularly traded and non-
regularly traded securities This is another source of finance for enterprises
Typically available for major expansion after being
established in the market
Some high potential start-ups also use this route for
risk financing (technology, biotech etc)
Entrepreneurship Development 8Funding
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Appropriate Source of Funding
Characteristics of venture
Business has high risk with an
uncertain return
Weak cash flow
Low to moderate growth
Unproven management
Source
Personal funds, friends and family,
bootstrapping
Funding Entrepreneurship Development 9
Business has low risk with
predictable return
Strong cash flow Audited financials
Good management
Debt financing
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Appropriate Source of Funding
Characteristics of venture
Business offers high return
Unique business idea
High growth
Niche market
Proven management
Source
Equity
Funding Entrepreneurship Development 10
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Funding Entrepreneurship Development 11
Owners money
Family and Friends
Business Angels
Venture Capital
Banks and Govt.
Private Placements
IPO
$10K 100K
$20K 250K
$100K 2M
$2M 50M
$5K and up
$500K and up
$5M and up
The financing continuum
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Debt financing
Funding Entrepreneurship Development 12
Debt financing Advantages No relinquishment of ownership More borrowing means greater return on equity When interest rates are low, cost of borrowing is justified
Debt financing Disadvantages Regular interest payments are reqd. Payback may result in cash flow problems Heavy use of debt can inhibit growth
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Business Angels vs. Venture Capitalists
Parameter
Personal
Firms funded
Due diligence done
Location of investment
Contract used
Monitoring after invst.
Exiting
Rate of return
Funds
Business Angels
Entrepreneurs
Small, Early stage
Minimal
Of concern
Simple
Active, hands-on
Of lesser concern
Of lesser concern
Personal
Funding Entrepreneurship Development 13
Venture Capitalists
Investors
Large, Mature
Extensive
Not important
Comprehensive
Strategic
Very important
Very important
Manage others
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Venture capital process
Objective of a venture capitalist is to generate long
term capital process thru debt and equity
investments
Objective of entrepreneur is survival or growth Can invest at any stage depending on risk appetite
Criteria for commitment
Strong management team Market opportunity must be unique and real
Potentially significant capital appreciation
Entrepreneurship Development 14Funding
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Venture capital process
Preliminary screening Business plan
Industry economics
Ability to evaluate/invest
Agreement on principal terms Deal terms and conditions
Due diligence
Detailed review of business suppliers, market, finances
Management interviews
Risk assessment
Final approval
Internal investment memorandum
Formal legal documentsEntrepreneurship Development 15Funding