Chapter 12

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Chapter 12

  1. 2. Chapter 12 Informal Risk Capital And Venture Capital
  2. 3. Financing The Business <ul><li>Early-Stage Financing </li></ul><ul><ul><li>Seed- Prove Concepts/Feasibility </li></ul></ul><ul><ul><li>Start-Up- Develop Initial Products For Commercial Sales </li></ul></ul><ul><li>Expansion/Development Funding- Support Initial Growth </li></ul><ul><li>Acquisition Financing (LBOs) </li></ul>
  3. 4. Risk-Capital Markets <ul><li>Informal-Risk Capital- Business Angels Who Are Individual Investors </li></ul><ul><li>Venture Capital- Money Raised By Venture Capitalists To Invest, Equity Participation </li></ul><ul><li>Public-Equity Markets </li></ul>
  4. 5. Venture Capital Firms <ul><li>Private Venture Capital- General & Limited Partners </li></ul><ul><li>Small Business Investment Company (SBIC) </li></ul><ul><li>Industry Sponsored: </li></ul><ul><ul><li>Banks/Financial Institutions </li></ul></ul><ul><ul><li>Non-Financial Companies </li></ul></ul><ul><li>State Government Sponsored </li></ul><ul><li>University Sponsored </li></ul>
  5. 6. Venture Capitalists <ul><li>Locating </li></ul><ul><li>Approaching- Select Right One </li></ul><ul><ul><li>Referred </li></ul></ul><ul><ul><li>Introduction </li></ul></ul><ul><ul><li>Don’t “Shop” It </li></ul></ul><ul><ul><li>Good Oral Presentation </li></ul></ul>
  6. 7. Venture Dollars Invested Per Deal In $ Billions
  7. 8. Venture Investments Stage In $ Millions
  8. 9. Venture Capital Investment Criteria <ul><li>Strong Management Team </li></ul><ul><li>Product/Market Opportunity Unique </li></ul><ul><li>Have Significant Capital Appreciation- 40 to 60% </li></ul>
  9. 10. Venture Capital Process <ul><li>Establish Philosophy & Investment Objectives </li></ul><ul><li>Stages </li></ul><ul><ul><li>Preliminary Screening- Business Plan </li></ul></ul><ul><ul><li>Agreement on Principal Terms </li></ul></ul><ul><ul><li>Due Diligence </li></ul></ul>
  10. 11. Company Valuation Factors <ul><li>Economic Outlook- General & Industry </li></ul><ul><li>Comparative Data </li></ul><ul><li>Book (Net) Value </li></ul><ul><li>Future Earning Capacity </li></ul><ul><li>Dividend-Paying Capacity </li></ul><ul><li>Assess Goodwill/Intangibles </li></ul><ul><li>Previous Sale Of Stock </li></ul><ul><li>Market Value Of Similar Companies’ Stock </li></ul>
  11. 12. Ratio Analysis- Liquidity Current Assets Current Liabilities = 108,050 40,500 = 2.67 Times Current Ratio Current Assets - Inventory Current Liabilities = 108,050 – 10,450 40,500 = 2.40 Times Acid Test Ratio
  12. 13. Ratio Analysis- Activity Accounts Receivable Average Daily Sales = 46,000 995,000/360 = 17 Days Average Collection Period Cost of Goods Sold Inventory = 645,000 10,450 = 61.7 Times Inventory Turnover
  13. 14. Ratio Analysis- Leverage Total Liabilities Total Assets = 249,700 308,450 81% Debt Ratio = Total Liabilities Stockholder’s Equity 249,700 58,750 4.25 Times Debt to Equity = =
  14. 15. Ratio Analysis- Profitability Net Profit Net Sales 8,750 995,000 0.88% Net Profit Margin = = Net Profit Total Assets 8,750 200,400 4.4 % Return on Investment = =
  15. 16. General Valuation Approaches <ul><li>Used To Determine Worth Of Company </li></ul><ul><li>Present Value Of Future Cash Flows- Based On Future Sales & Profits </li></ul><ul><li>Replacement Value- Cost Of Replacing Assets </li></ul><ul><li>Book Value- Net Balance Sheet Value Of Assets </li></ul><ul><li>Earnings- Based on Present & Future Earnings </li></ul><ul><li>Factor Approach- Uses Earnings, Book Value & Dividend-Paying Capacity </li></ul><ul><li>Liquidation Value- Value If Everything Sold </li></ul>
  16. 17. 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. 18. Venture Capitalist’s Factors In Pricing A Deal <ul><li>Return </li></ul><ul><li>Amount of Money Now/Later </li></ul><ul><li>Quality of Deal </li></ul><ul><li>Quality of Team </li></ul><ul><li>Amount Entrepreneur is Investing </li></ul><ul><li>Company’s Future Prospects </li></ul><ul><li>Upside Potential </li></ul><ul><li>Downside Risk </li></ul><ul><li>Investment Collateral </li></ul><ul><li>Liquidity </li></ul><ul><li>Exit Strategy </li></ul>

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