VENTURE CAPITAL

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VENTURE CAPITAL

• IMPORTANT SOURCE OF EQUITY FOR HIGH GROWTH
  COMPANIES

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• 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.

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BACKGROUND

• VENTURE CAPITAL FIRM BACKED FIRMS RESPONSIBLE FOR
• 3.3 OF NATIONS JOBS
• 7.4 OF GROSS DOMESTIC PRODUCT
• ALL FOR ONLY 1 OF NATION INVEST.
• GAZELLES (gt20 GROWTH) ARE 5 OF NATIONS
  FIRMS 2/3 NEW JOBS

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BIG CHANGE IN FINANCING

• GROWING WEALTH/DISPOSABLE INCOME
• VERY VISIBLE HIGH TECH COMPANIES - poster
  children for feast-or-famine nature of venture
  capital
• RECENT SURVEY - 6/100 of high tech startups had
  traditional bank debt as first-round financing

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VENTURE CAPITAL ROLES

• PURCHASE EQUITY OR HYBRID SECURITIES
• ASSIST IN NEW PRODUCT DEVELOPMENT
• FOCUS ON HIGHER RISK-RETURN COMPANIES

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SAMPLE FIRMS THAT USED VENTURE CAPITAL

• FEDERAL EXPRESS
• COMPAQ
• SUN MICROSYSTEMS
• INTEL
• MICROSOFT

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VARIABLE TRAITS OF VENTURE CAPITAL FUND

• RISK
• LENGTH OF COMMITMENT
• INVESTMENT ILLIQUIDITY
• MINIMUM COMMITMENT

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STRATEGY OF V.C. FIRMP. 283 OF TEXT

• MANAGEMENT ABILITY
• WELL-DEFINED NICHE BUSINESS
• LEADING MARKET POSITION
• STRONG GROWTH POTENTIAL
• CONSOLIDATION
• RISK AVOIDANCE
• REASONABLE SELLING PRICE

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EXIT OPTION 1

• MERGER/ACQUISTION
• MOST FREQUENT EXIT
• AT LEAST 3-5 YEARS AFTER INITIAL INVESTMENT

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EXIT OPTION 2

• INITIAL PUBLIC OFFERING (IPO)
• MOST GLAMOROUS
• FUND GETS PUBLIC SHARES BUT OFTEN MAY NOT BE
  TRADED FOR UP TO 2 YEARS

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WHAT INDUSTRIES ATTRACT VENTURE CAP.

• Poised for rapid growth/high profit
• Sustainable growth in excess of 5 years
• Niche or emerging markets
• market large enough to support in range of 100
  million in company value
• health care
• information technology (?)

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LIFE CYCLE OPTIONS FOR V.C. INVESTMENT

• SEED INVESTING - before the real product or
  company is organized
• 300-3 million
• EARLY STAGE INVESTING - after first product
  development
• 3 million - 20 million

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V.C. CYCLE CONT.

• EXPANSION STAGE - beyond critical mass toward
  more successful firm
• 20 MILLION-100 MILLION
• STAGE AT WHICH IPO OR FIRM BUYOUT EXPECTED
• LATER STAGE - also through exit via stock
  offering or buyout

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EVALUATION APPROACH

• Uniqueness of product
• Will company become profitable?
• How will proceeds be used?
• Management able and willing to meet specific
  goals?
• Is there an exit strategy for equity investors?

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VALUATION APPROACHES

• EARLY STAGE FIRMS - focus on management
• EXPANSION STAGE FIRMS - value multiple of
  revenues
• LATE STAGE FIRMS - MULTIPLE OF EARNINGS

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CASE STUDY VALUATIONS

• HOP-IN-FOODS - P. 259-260
• BERG ELECTRONICS - P. 281
• Q COMPARE IPO FIRMS WITH FIRMS IN SAME INDUSTRY