Venture Capital
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Venture Capital

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Venture Capital Venture Capital Presentation Transcript

  • VENTURE CAPITAL
  • VENTURE CAPITAL
    • Volatile: High Success and Failure Rates
    • Source of Innovation: New Ideas and Ways to do Things
    • Contribute Disproportionately to New Job Formation
    American Capitalism produces New/Small Businesses that are
  • VENTURE CAPITAL
    • Adverse Selection Problem: How can Investor know whether Business Opportunity is Feasible? How can Entrepreneur Objectively Communicate likelihood of Market Acceptance?
    • Moral Hazard Problem: How can Investor evaluate Entrepreneur's Ability? How can Entrepreneur communicate Capacity, Credibility and Commitment?
    • Contracting Problem: How can Parties Agree (1) about How to Control Business in Dynamic, Uncertain Environment and (2) on Incentives that Reward Different, sometimes Conflicting, Motives?
  • VENTURE CAPITAL
    • Customary Development Paths
    • Independent Development
      • Founder Equity  Profitability/Retained Earnings  External Debt  External Equity (IPO)
    • Strategic Alliances
      • Collaborative Relationships with Other Firms to Certify Legitimacy and Credibility. May be informal arrangements, joint venture or licensing agreements
    • Merger/Acquisition
      • Sale of Partial/Complete Ownership (and Control) as Consideration for Necessary Investment Capital
  • VENTURE CAPITAL
    • Financing by Venture Capital Funds
    • Specialized Approach for Supplying Capital to New Ventures with Sufficient Managerial Expertise, Scale and Product/Market Innovation
    • Addresses Financing Dilemma presented by Entrepreneurial Firms
      • No Verifiable Cash Flows or Tangible Assets
      • How to Exert Control Necessary to Obtain Desired Investment Performance and Minimize Risk
  • VENTURE CAPITAL
    • Venture Capital Partnership
    • Venture Capitalists are Specialized Financial Investment Intermediaries
    • Organizational Form will be Limited Partnership
      • Limited Partner Investors: usually Pension Funds
      • General Partners select Portfolio Company Investments, Negotiate Terms and Monitor
  • Organizational Structure of Venture Capital Investment ©2000, Entrepreneurial Finance , Smith and Kiholm Smith Chapter 14
    • Portfolio Companies
    • Value creation
    • Generate deal flow
    • Screen opportunities
    • Harvest investments
    • Negotiate deals
    • Monitor and advise
    General Partners Venture Capital Fund
    • Pension plan
    • Endowments
    • Life insurance companies
    • Corporations
    • Individuals
    Limited Partners Effort and 1% of capital Annual Management Fee 2-3% Carried Interest 20-30% of Gain 99% of Investment Capital Capital Appreciation 70-80% of Gain Investment Capital and Effort Financial Claims
  • VENTURE CAPITAL
    • Hybrid Financing Techniques by VC Funds
    • Because New Venture has No Verifiable Cash Flow or Tangible Assets for Collateral
      • Debt not Viable Option
      • Consideration for Investment is Transfer of Negotiated Ownership Interest (Stock Sale), which includes Measure of Control, from Entrepreneur/Founder to Venture Capitalist
  • VENTURE CAPITAL
    • Hybrid Structure: Preferred Stock convertible into Common Stock
      • Dividends accrue at Debt-like Rate; Payable at Positive Cash Flow
      • When Milestones achieved, non-Voting Preferred Stock converts into Voting Common Stock
      • Venture Capitalist will have Board Membership and Control over Major Strategic Decisions
  • VENTURE CAPITAL
    • Hybrid Financing used by VC Funds
    • Ultimate Source of Repayment for Investment will be Initial Public Offering (IPO)
      • Managing General Partners paid
        • By Limited Partners/Investors for Management Services and …
        • Percentage of Capital Gain at IPO
      • Limited Partners/Investors earn Capital Gain
      • Investment Time Frame: 7 to 10 years
  • VENTURE CAPITAL
    • Myths about Venture Capital Financing
    • VCs want no less than 50% Ownership
    • Fact: VC Funds customarily hold 47% to 53% Voting Interest
    • VCs have the Right to Fire the Founder/CEO
    • Fact: Customary Condition is Employment Contract authorizing Majority of Directors to fire Founder/CEO “ with or without cause .” Performance Issues vs. Company Needs: Administrator or Inspirational Leader
  • VENTURE CAPITAL
    • Myths about Venture Capital Financing
    • VCs dominate the Private Equity Market
    • Fact: VCs account for less than 1% of the Private Equity Market
    • VCs finance a Broad Range of Industry Types on a Nationwide Basis
    • Fact: Most VC investments are in High-Technology or Bio-science Industries in California’s Silicon Valley or Boston area
  • VENTURE CAPITAL
    • Myths about Venture Capital Financing
    • VCs expect to Earn a 700% Rate of Return within Two to Three Years
    • Fact: VCs aim to “harvest” their Investments within 7 to 10 Years (and try to earn no less than 700%)
    • Governments invest in VC Funds because they are a “Win-Win” Situation: Eye-Popping Rates of Return and High-Paying Jobs
    • Fact: Probable Returns will be around 25% with less than half of Firms surviving more than 3 years
  • VENTURE CAPITAL
    • What is a VC Fund’s “Value Proposition”?
    • Provide all Financing necessary for Firm’s Product Life Cycle
    • Association with VC Fund brings Credibility and Legitimacy to Entrepreneur
    • Access to Strategic Services and Tactical Advice from Sole Provider with Expertise
  • VENTURE CAPITAL
    • Sources of Financing for New Venture pursuing Independent Development
    • Founder’s Private Equity and Short-term Debt
    • The Three “Fs”: Friends, Families and Fools
    • Angels: Investors who are Risk-Sharers
    • Bootstrapping: Suppliers and Customers with Stake in Firm’s Success
    • Alliances with Resource Providers: Manufacturers, Distributors or Retailers (Beware of Hold-up Power; Evaluate Value of Current Marginal Resource Gain versus Constrained Future Flexibility)
  • VENTURE CAPITAL
    • Characteristics of Firm Development when Venture Capitalist Funding Not Used
    • Reliance on Informal Networks for Credibility and Necessary Services and Expertise
    • Slower Growth Rate/Longer Life-Cycle Stages
    • Multiple Sources of Funds that Provide Short- Term Funding
    • Different Relationship between Control and Risk/Uncertainty
  • VENTURE CAPITAL
    • Future for Firms needing Venture Capital
    • Evolution of VC Fund Industry into (1) Mass Market and (2) Niche Providers differentiated by Industry, Geography or Development Stage
    • For Everyone Else… Fundamentals Still and Will Always be the Rule
      • Well-conceived Opportunities always get Financed
      • Obtaining External Financing Must Follow and Will Be Determined by Strategic Development
      • Risk is always Financeable; Resolving Uncertainty is Entrepreneur’s Challenge