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Entrepreneurship Chap 12

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  • 1. HisrichPetersShepherdChapter 12Informal Risk Capital,Venture Capital,andGoing PublicCopyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
  • 2. 12-2Financing the Business Criteria for evaluating appropriateness offinancing alternatives: Amount and timing of funds required. Projected company sales and growth. Three types of funding: Early stage financing. Development financing. Acquisition financing.
  • 3. 12-3Table 12.1 - Stages of BusinessDevelopment Funding
  • 4. 12-4 Risk capital markets provide debt andequity to nonsecure financing situations. Types of risk capital markets: Informal risk capital market. Venture-capital market. Public-equity market. All three can be a source of funds for stage-one financing. However, public-equity market is available onlyfor high-potential ventures.Financing the Business (cont.)
  • 5. 12-5Informal Risk Capital It consists of a virtually invisible group ofwealthy investors (business angels). Investments range between $10,000 to$500,000. Provides funding, especially in start-up(first-stage) financing. Contains the largest pool of risk capital inthe United States.
  • 6. 12-6Table 12.2 - Characteristics ofInformal Investors
  • 7. 12-7Table 12.2 - Characteristics ofInformal Investors (cont.)
  • 8. 12-8Venture Capital Nature of Venture Capital A long-term investment discipline, usuallyoccurring over a five-year period. The equity pool is formed from the resources ofwealthy limited partners. Found in: Creation of early-stage companies. Expansion and revitalization of businesses. Financing of leveraged buyouts of existing divisions ofmajor corporations or privately owned businesses. Venture capitalist takes an equity participationin each of the investments.
  • 9. 12-9Figure 12.1 - Types of Venture-Capital Firms
  • 10. 12-10Figure 12.3 - Percentage of VentureDollars Raised by Stage in 2008
  • 11. 12-11 Venture-Capital Process Objective of a venture-capital firm - Generationof long-term capital appreciation through debtand equity investments. Criteria for committing to venture: Strong management team. A unique product and/or market opportunity. Business opportunity must show significant capitalappreciation.Venture Capital (cont.)
  • 12. 12-12Figure 12.4 - Venture-CapitalFinancing: Risk and Return Criteria
  • 13. 12-13 Venture-capital process can be brokendown into four primary stages: Stage I: Preliminary screening – Initialevaluation of the deal. Stage II: Agreement on principal terms -Between entrepreneur and venture capitalist. Stage II: Due diligence - Stage of dealevaluation. Stage IV: Final approval - Document showingthe final terms of the deal.Venture Capital (cont.)
  • 14. 12-14 Locating Venture Capitalists Venture capitalists tend to specialize eithergeographically by industry or by size and type ofinvestment. Entrepreneur should approach only those thatmay have an interest in the investmentopportunity. Most venture capital firms belong to the NationalVenture Capital Association.Venture Capital (cont.)
  • 15. 12-15Table 12.6 - Guidelines for Dealingwith Venture Capitalists
  • 16. 12-16Table 12.6 - Guidelines for Dealingwith Venture Capitalists (cont.)
  • 17. 12-17Valuing Your Company Factors in Valuation Nature and history of business. Economic outlook- general and industry. Comparative data. Book (net) value. Future earning capacity. Dividend-paying capacity. Assessment of goodwill/intangibles. Previous sale of stock. Market value of similar companies’ stock.
  • 18. 12-18 Ratio Analysis Serves as a measure of financial strengths andweaknesses of the venture but should be usedwith caution. It is typically used on actual financial results. Provides a sense of where problems exist in thepro forma statements.Valuing Your Company (cont.)
  • 19. 12-19Valuing Your Company (cont.)
  • 20. 12-20Valuing Your Company (cont.)
  • 21. 12-21Valuing Your Company (cont.)
  • 22. 12-22Valuing Your Company (cont.)
  • 23. 12-23 General Valuation Approaches Assessment of comparable publicly heldcompanies and the prices of these companies’securities. Present value of future cash flow. Replacement value. Book value. Earnings approach. Factor approach. Liquidation value.Valuing Your Company (cont.)
  • 24. 12-24Valuing Your Company (cont.)
  • 25. 12-25Table 12.7 - Steps in Valuing YourBusiness and Determining Investors’Share
  • 26. 12-26Evaluation of an Internet Company Qualitative portion of due diligence carriesmore weight. Focus is more on the market itself. Companys financial projections arecompared with the future market in termsof fit, realism, and opportunity. Management team is examined. Opportunities available in the investormarket are examined.
  • 27. 12-27Deal Structure Terms of the transaction between theentrepreneur and the funding source. Needs of the funding sources: Rate of return required. Timing and form of return. Amount of control desired. Perception of risks. Entrepreneur’s needs: Degree and mechanisms of control. Amount of financing needed. Goals for the particular firm.
  • 28. 12-28Going Public Selling some part of the company byregistering with the Securities andExchange Commission (SEC). Resulting capital infusion provides the companywith: Financial resources. A relatively liquid investment vehicle. Company consequently gains: Greater access to capital markets in the future. A more objective picture of the public’s perception ofthe value of the business.
  • 29. 12-29Table 12.8 - Advantages andDisadvantages of Going Public
  • 30. 12-30Timing of Going Public andUnderwriter Selection Timing Is the company large enough? What is the amount of the company’s earnings,and how strong is its financial performance? Are the market conditions favorable for an initialpublic offering? How urgently is the money needed? What are the needs and desires of the presentowners?
  • 31. 12-31 Underwriter Selection Managing underwriter - Lead financial firm inselling stock to the public. Underwriting syndicate - A group of firmsinvolved in selling stock to the public. Factors to consider in selection: Reputation. Distribution capability. Advisory services. Experience. Cost.Timing of Going Public andUnderwriter Selection (cont.)
  • 32. 12-32Registration Statement andTimetable “All hands” meeting - Preparing a timetablefor the registration process. First public offering requires six to eightweeks. The SEC takes six to 12 weeks to declarethe registration effective.
  • 33. 12-33 Reasons for delays: Heavy periods of market activity. Peak seasons. Attorney’s unfamiliarity with federal or stateregulations. Issues arising over requirements of the SEC. When the managing underwriter isinexperienced.Registration Statement andTimetable (cont.)
  • 34. 12-34 SEC attempts to ensure that the documentmakes a full and fair disclosure of thematerial reported. Registration statement consists of: Prospectus. Registration statement. Most initial public offerings will use a FormS-1 registration statement.Registration Statement andTimetable (cont.)
  • 35. 12-35 Cover page Prospectus summary Description of thecompany Risk factors Use of proceeds Dividend policy Capitalization Dilution Selected financialdata Business,management, andowners Type of stock Underwriterinformation Actual financialstatements.Registration Statement andTimetable (cont.)Prospectus
  • 36. 12-36 The Registration Statement Information regarding: Offering. Past unregistered securities offering of the company. Other undertakings by the company. Includes exhibits: Articles of incorporation. Underwriting agreement. Company bylaws. Stock option and pension plans. Initial contracts.Registration Statement andTimetable (cont.)
  • 37. 12-37 Procedure Preliminary prospectus (red herring) can bedistributed to the underwriting group. Deficiencies are communicated throughtelephone or a comment letter. Pricing amendment - Additional information onprice and distribution is submitted to the SEC todevelop the final prospectus. Waiting period - Time between the initial filingand its effective date is usually around 2 to 10months.Registration Statement andTimetable (cont.)
  • 38. 12-38Legal Issues and Blue-SkyQualifications Legal Issues Quiet period – 90-day period in going publicwhen no new company information can bereleased. Blue-Sky Qualifications Blue-sky laws - Laws of each state regulatingpublic sale of stock. May cause additional delays and costs to thecompany. Many states allow their state securitiesadministrators to prevent an offering from beingsold in their state.
  • 39. 12-39After Going Public Aftermarket Support Actions of underwriters to help support the priceof stock following the public offering. Relationship with the Financial Community Has a significant effect on the market interestand the price of the company’s stock.
  • 40. 12-40 Reporting Requirements The company must file: Annual reports on Form 10-K. Quarterly reports on Form 10-Q. Specific transaction or event reports on Form 8-K. Company must follow proxy solicitationrequirements.After Going Public (cont.)