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Chapter

12. Chapter. Informal Risk Capital And Venture Capital. Financing The Business. Early-Stage Financing Seed- Prove Concepts/Feasibility Start-Up- Develop Initial Products For Commercial Sales Expansion/Development Funding- Support Initial Growth Acquisition Financing (LBOs).

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  1. 12 Chapter Informal Risk Capital And Venture Capital

  2. Financing The Business • Early-Stage Financing • Seed- Prove Concepts/Feasibility • Start-Up- Develop Initial Products For Commercial Sales • Expansion/Development Funding- Support Initial Growth • Acquisition Financing (LBOs)

  3. Risk-Capital Markets • Informal-Risk Capital- Business Angels Who Are Individual Investors • Venture Capital- Money Raised By Venture Capitalists To Invest, Equity Participation • Public-Equity Markets

  4. Venture Capital Firms • Private Venture Capital- General & Limited Partners • Small Business Investment Company (SBIC) • Industry Sponsored: • Banks/Financial Institutions • Non-Financial Companies • State Government Sponsored • University Sponsored

  5. Venture Capitalists • Locating • Approaching- Select Right One • Referred • Introduction • Don’t “Shop” It • Good Oral Presentation

  6. Venture DollarsInvested Per Deal In $ Billions

  7. Venture Investments Stage In $ Millions

  8. Venture CapitalInvestment Criteria • Strong Management Team • Product/Market Opportunity Unique • Have Significant Capital Appreciation- 40 to 60%

  9. Venture Capital Process • Establish Philosophy & Investment Objectives • Stages • Preliminary Screening- Business Plan • Agreement on Principal Terms • Due Diligence

  10. Company Valuation Factors • Economic Outlook- General & Industry • Comparative Data • Book (Net) Value • Future Earning Capacity • Dividend-Paying Capacity • Assess Goodwill/Intangibles • Previous Sale Of Stock • Market Value Of Similar Companies’ Stock

  11. Ratio Analysis- Liquidity Current Ratio Current Assets Current Liabilities 108,050 40,500 = = 2.67 Times Acid Test Ratio = Current Assets - Inventory Current Liabilities 108,050 – 10,450 40,500 = 2.40 Times

  12. Ratio Analysis- Activity Average Collection Period Accounts Receivable Average Daily Sales 46,000 995,000/360 = = 17 Days Inventory Turnover Cost of Goods Sold Inventory 645,000 10,450 = = 61.7 Times

  13. Ratio Analysis- Leverage Debt Ratio Total Liabilities Total Assets 249,700 308,450 = = 81% Debt to Equity Total Liabilities Stockholder’s Equity 249,700 58,750 = = 4.25 Times

  14. Ratio Analysis- Profitability Net Profit Margin Net Profit Net Sales 8,750 995,000 = = 0.88% Return on Investment Net Profit Total Assets 8,750 200,400 = = 4.4 %

  15. General Valuation Approaches • Used To Determine Worth Of Company • Present Value Of Future Cash Flows- Based On Future Sales & Profits • Replacement Value- Cost Of Replacing Assets • Book Value- Net Balance Sheet Value Of Assets • Earnings- Based on Present & Future Earnings • Factor Approach- Uses Earnings, Book Value & Dividend-Paying Capacity • Liquidation Value- Value If Everything Sold

  16. Venture Capital Valuation- Based on Required Return VC $ Investment X VC Investment Multiple Desired Company’s Projected Profit In Year 5 X PE Multiple of Similar Company

  17. Return Amount of Money Now/Later Quality of Deal Quality of Team Amount Entrepreneur is Investing Company’s Future Prospects Upside Potential Downside Risk Investment Collateral Liquidity Exit Strategy Venture Capitalist’sFactors In Pricing A Deal

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