Venture Capital

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Venture Capital

  1. 1. VENTURE CAPITAL IMPORTANT SOURCE OF EQUITY FOR HIGH GROWTH COMPANIES
  2. 2. <ul><li>“POOL OF CAPITAL, TYPICALLY ORGANIZED AS A LIMITED PARTNERSHIP, WHICH INVESTS IN COMPANIES THAT REPRESENT AN OPPORTUNITY FOR A HIGH RATE OF RETURN WITHIN 5-7 YEARS.” </li></ul>
  3. 4. BACKGROUND <ul><li>VENTURE CAPITAL FIRM BACKED FIRMS RESPONSIBLE FOR </li></ul><ul><ul><li>3.3% OF NATION’S JOBS </li></ul></ul><ul><ul><li>7.4% OF GROSS DOMESTIC PRODUCT </li></ul></ul><ul><ul><li>ALL FOR ONLY 1% OF NATION INVEST. </li></ul></ul><ul><ul><li>“GAZELLES” (>20% GROWTH) ARE 5% OF NATION’S FIRMS; 2/3 NEW JOBS </li></ul></ul>
  4. 5. BIG CHANGE IN FINANCING <ul><li>GROWING WEALTH/DISPOSABLE INCOME </li></ul><ul><li>VERY VISIBLE HIGH TECH COMPANIES - poster children for feast-or-famine nature of venture capital </li></ul><ul><li>RECENT SURVEY - 6/100 of high tech startups had traditional bank debt as first-round financing </li></ul>
  5. 6. VENTURE CAPITAL ROLES <ul><li>PURCHASE EQUITY OR HYBRID SECURITIES </li></ul><ul><li>ASSIST IN NEW PRODUCT DEVELOPMENT </li></ul><ul><li>FOCUS ON HIGHER RISK-RETURN COMPANIES </li></ul>
  6. 7. SAMPLE FIRMS THAT USED VENTURE CAPITAL <ul><li>FEDERAL EXPRESS </li></ul><ul><li>COMPAQ </li></ul><ul><li>SUN MICROSYSTEMS </li></ul><ul><li>INTEL </li></ul><ul><li>MICROSOFT </li></ul>
  7. 8. VARIABLE TRAITS OF VENTURE CAPITAL FUND <ul><li>RISK </li></ul><ul><li>LENGTH OF COMMITMENT </li></ul><ul><li>INVESTMENT ILLIQUIDITY </li></ul><ul><li>MINIMUM $ COMMITMENT </li></ul>
  8. 9. STRATEGY OF V.C. FIRM P. 283 OF TEXT <ul><li>MANAGEMENT ABILITY </li></ul><ul><li>WELL-DEFINED NICHE BUSINESS </li></ul><ul><li>LEADING MARKET POSITION </li></ul><ul><li>STRONG GROWTH POTENTIAL </li></ul><ul><li>CONSOLIDATION </li></ul><ul><li>RISK AVOIDANCE </li></ul><ul><li>REASONABLE SELLING PRICE </li></ul>
  9. 10. EXIT OPTION 1 <ul><li>MERGER/ACQUISTION </li></ul><ul><ul><li>MOST FREQUENT EXIT </li></ul></ul><ul><ul><li>AT LEAST 3-5 YEARS AFTER INITIAL INVESTMENT </li></ul></ul>
  10. 11. EXIT OPTION 2 <ul><li>INITIAL PUBLIC OFFERING (IPO) </li></ul><ul><ul><li>MOST GLAMOROUS </li></ul></ul><ul><ul><li>FUND GETS PUBLIC SHARES BUT OFTEN MAY NOT BE TRADED FOR UP TO 2 YEARS </li></ul></ul>
  11. 12. WHAT INDUSTRIES ATTRACT VENTURE CAP. <ul><li>Poised for rapid growth/high profit </li></ul><ul><li>Sustainable growth in excess of 5 years </li></ul><ul><li>Niche or emerging markets </li></ul><ul><li>market large enough to support in range of $100 million in company value </li></ul><ul><ul><li>health care </li></ul></ul><ul><ul><li>information technology (?) </li></ul></ul>
  12. 13. LIFE CYCLE OPTIONS FOR V.C. INVESTMENT <ul><li>SEED INVESTING - before the real product or company is organized </li></ul><ul><ul><li>$300-3 million </li></ul></ul><ul><li>EARLY STAGE INVESTING - after first product development </li></ul><ul><ul><li>$3 million - $20 million </li></ul></ul>
  13. 14. V.C. CYCLE CONT. <ul><li>EXPANSION STAGE - beyond critical mass toward more successful firm </li></ul><ul><ul><li>$20 MILLION-$100 MILLION </li></ul></ul><ul><ul><li>STAGE AT WHICH IPO OR FIRM BUYOUT EXPECTED </li></ul></ul><ul><li>LATER STAGE - also through exit via stock offering or buyout </li></ul>
  14. 15. EVALUATION APPROACH <ul><li>Uniqueness of product </li></ul><ul><li>Will company become profitable? </li></ul><ul><li>How will proceeds be used? </li></ul><ul><li>Management able and willing to meet specific goals? </li></ul><ul><li>Is there an exit strategy for equity investors? </li></ul>
  15. 16. VALUATION APPROACHES <ul><li>EARLY STAGE FIRMS - focus on management </li></ul><ul><li>EXPANSION STAGE FIRMS - value = multiple of revenues </li></ul><ul><li>LATE STAGE FIRMS - MULTIPLE OF EARNINGS </li></ul>
  16. 17. CASE STUDY VALUATIONS <ul><li>HOP-IN-FOODS - P. 259-260 </li></ul><ul><li>BERG ELECTRONICS - P. 281 </li></ul><ul><li>Q: COMPARE IPO FIRMS WITH FIRMS IN SAME INDUSTRY </li></ul>

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