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  • 1. What is Venture Capital/Private Equity?
    • Venture capital is a subset of private equity and
    • refers to equity investments made for the launch,
    • early development, or expansion of a business
    • Among different countries, there are variations in
    • what is meant by venture capital and private equity
    • In Europe, these terms are generally used
    • interchangeably and venture capital thus includes
    • management buy-outs and buy-ins (MBO/MBIs).
    • This is in contrast to the US, where MBO/MBIs are
    • not classified as venture capital.
  • 2. CONTD..
    • Private equity provides equity capital to enterprises
    • not quoted on a stock market
    • Private equity can be used to develop new products
    • and technologies, to expand working capital, to
    • make acquisitions, or to strengthen a company's
    • balance sheet.
    • It can also resolve ownership and management
    • issues - a succession in family-owned companies, or
    • the buy-out or buy-in of a business by experienced
    • managers may be achieved using private equity
    • funding.
  • 3. Why companies need financing?
    • For start-ups or growing companies, as well as those
    • facing a major change, financing is one of the key
    • business issues.
    • New capital is needed e.g. for
    • 1. Financing of product development
    • 2. Financing of market penetration
    • 3. Financing of investments
    • 4. Working capital financing to secure operative
    • continuity
    • 5. Maintaining liquidity to be able to cover daily
    • payments
  • 4. CONTD..
    • During their start-up, growth and expansion stages,
    • the companies are often faced with the fact that the
    • incoming cash flow is not sufficient for the
    • operations. The company's cumulative cash flow is
    • negative. The time needed for turning the company's
    • cash flow positive varies considerably
    • A long product development stage and slow market
    • penetration prolong the negative cash flow period.
    • The company can have a negative cash flow for
    • years, a situation that is typical in high-tech
    • branches.
  • 5. Operative financing
    • To bridge the deficit in operative financing, the
    • company has the following choice of available
    • measures:
    • 1. to ensure that the liquidity planning has been
    • appropriate
    • 2. to make the clients pay their invoices on time by
    • offering, for example, discounts for rapid payments
    • 3. to intensify the collection of sales receivables
    • 4. to delay the payments to suppliers within their
    • terms of payment
    • 5. to maximize the sales margins to cut indirect costs
  • 6. External financing
    • Should these measures not be sufficient, the company has the following alternatives:
    • 􀁺 to acquire equity capital (e.g. venture capital investors)
    • 􀁺 to borrow capital
    • 􀁺 to apply for public subsidies
  • 7. The Process of acquiring Venture Capital financing
    • The actual venture capital investment made in a company is
    • preceded by a thorough and selective assessment of potential
    • investment targets made by the venture capital investor. At the
    • first stage, the assessment of the investment request is based
    • on a business plan made by the company.
    • This is the stage where most of the projects (about 90 %) of all
    • proposed projects are rejected.
    • The initial assessment is made relatively rapidly and therefore
    • the company should pay attention to two aspects: the business
    • plan should be carefully prepared and the contact targeted to
    • the correct investors. A well-prepared business plan summary
    • is the best means of attracting and convincing the investor.
  • 8. CONTD..
    • The central issues considered by the venture capital
    • investor at this stage are:
    • 􀁺 Is the company able to conduct profitable and
    • growing business operations?
    • 􀁺 Do the company executives have the necessary
    • qualities to manage the business in the various
    • development stages?
    • 􀁺 Will the investor be able to obtain the desired return
    • through an increase in the company's net worth?
  • 9. CONTD..
    • Besides the company's business plan, the venture
    • capital investor will assess the compatibility of the
    • investment request against its own investment
    • strategy
    • 􀁺 The decisive investment strategy criteria may be
    • company size, development stage, branch or
    • geographical location.
    • 􀁺 Contacts directed to the correct investors at an early
    • stage of the process will save time and diminish the
    • probability of negative answers.
  • 10. CONTD..
    • Should the investor decide that the
    • investment request meets his criteria, the
    • following step is a meeting arranged with the
    • company management
    • Experience has shown that about half of the remaining companies are discarded at the negotiation stage
  • 11.
    • The third stage, or the due diligence stage, involves a thorough
    • study of the target company by the venture capital investor who
    • assesses the company on the basis of his own, weighted
    • investment criteria.
    • 􀁺 The preparedness of the company management to launch and
    • developed the business in question is generally seen as the
    • most important criterion.
    • 􀁺 Other vital issues include the size and development of the
    • company's target market, the competitiveness of the company's
    • product and technology as well as the capital required by the
    • business at the actual investment stage and the eventual
    • additional investment needs.
  • 12. CONTD..
    • During the second and third stage of the assessment
    • process, the investor determines the value of the
    • company. Once the entrepreneur and the investor
    • have agreed on the value, the investor's future share
    • of the company is determined.
    • 􀁺 The entry valuation of investor will depend on factors
    • such as investors return expectations, propotion of
    • the company that the management will give up to
    • attract the investments and the view of the
    • opportunity for new concept, product or service
  • 13. CONTD..
    • The intention is to liquidate the shareholding in early
    • phase companies after 4-8 years and in companies
    • with follow-on funding after 1-3 years
    • 􀁺 In the end, the investment is made in about 3 to 4 %
    • cases of all received investment requests. The
    • parties finally make a shareholder agreement to
    • establish practical operating rules.
    • 􀁺 VC’s exit could be anything between liquidation and
    • IPO
  • 14. Stages of Investments
    • Early stage companies may have proprietary technology or
    • intellectual property that has the potential to be exploited on a
    • global scale. The technology or lead product is usually beyond
    • proof of principle stage
    • 􀁺 Mid-stage companies may have strong pipeline of technologies
    • and products, which has been developed by research and
    • management teams with scientific and commercial credibility
    • 􀁺 Later stage companies have operational and corporate finance
    • skills ideally positioned and company may need investments to
    • precipitate consodilations. Companies at this stage are within
    • 12 to 18 months of an IPO.
  • 15. VC’s contribution to entrepreneur
    • In addition to money, professional VC as a shareholder bring
    • strong industry, operational, financial and investment banking
    • skills to the partnership with the target company
    • 􀁺 Through the VC’s expertise and network the portfolio
    • companies could gain access to:
    • a) follow-on capital through venture capital ties
    • b) knowledge of partnership opportunities in multiple markets
    • c) in-depth operational and management experience’
    • d) access to high-quality management teams
    • e) ties to the investment banking community
  • 16. CONTD..
    • VC adds the most value by assisting in the
    • creation of the best possible team to manage
    • and supervise the target company
    • 􀁺 Management assessment is one of the major
    • tasks to be carried out by the venture capital
    • before deciding to invest
  • 17. Ten Questions Your Business Plan Should Answer From The VC’s Point Of View
    • 1. Where is the company now?
    • 2. What is your product or service?
    • 3. What is your market?
    • 4. How will you reach the market?
    • 5. Who will you be competing against?
    • 6. How will your product be produced?
    • 7. Who are the people?
    • 8. What are your financial projections?
    • 9. How much money will you need?
    • 10. What are the risks?