Informal Risk Capital

1
Informal Risk Capital Venture Capital
2
Financing the Business

• Stages for Financing
• Early-stage financing
• Seed capital
• Start-up financing
• Development-stage financing
• Second stage
• Third stage
• Fourth stage
• Acquisition-financing
• Traditional acquisitions
• Leveraged buyouts
• Public-equity

3
Risk-Capital Markets

• Informal risk capital
• Venture-capital market
• Public equity

4
Informal Risk Capital Markets

• Business angels
• Usually start-up
• Hard to calculate exact size
• Characteristics
• Industries
• Investment size
• Time frame
• Finding them

5
Venture Capital

• Nature of Venture Capital
• Definition
• General partners
• Limited partners
• Length of investment

6
Overview of Venture Capital

• 1946- American Research and Development
  Corporation
• 1958- Small Business Investment Act
• 1960s 585 SBICs Today 360
• Late 1960s- Private Venture Capital Firms
• Today980

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Overview of Venture Capital

• Corporations
• State-sponsored Venture Capital
• University-sponsored Venture Capital
• Characteristics
• Size
• Industries
• Stages of business being funded
• Geographic location

8
VC Process

• What do venture capitalists want?
• Basic Goal
• Trusting relationship with entrepreneur
• Business criteria
• Strong management team
• Unique Product/MKT Opportunity
• Good ROI
• Early-stage v. late-stage

9
VC Process

• Portfolio establishment
• Four stages
• Preliminary
• Evaluate business plan
• Background information
• Agreement on principal terms
• Due diligence
• Longest stage
• Detail-oriented
• Final approval

10
VC Process

• Where to find venture capitalists?
• Member lists
• Referrals
• Approaching venture capitalists
• Call to check specialization
• Send plan and short letter
• General rules

11
Valuing the Company

• Eight Factors
• Nature and History of Venture
• Economy and Finances from Business
• Book Value and Overall Financial Conditions
• Future Earnings Capacity
• Dividend-paying Capacity
• Goodwill and Intangible Assets
• Any Previous Stock Sales
• Market Price of Stocks in Same Industry

12
Ratio Analysis

• Liquidity Ratios
• Current Ratio
• Current Assets/ Current Liabilities
• Acid Test Ratio
• (Current Assets-Inventory)/ Current Liabilities
• Activity Ratios
• Average Collection Period
• Accounts Receivable/ Average Daily Sales
• Inventory Turnover
• Net Profit/ Total Assets

13
Ratio Analysis

• Leverage Ratios
• Debt Ratio
• Total Liability/ Total Assets
• Debt-to-Equity Ratio
• Total Debt/ Total Equity
• Profitability Ratios
• Net Profit Margins
• Net Profit/ Net Sales
• Return on Investment
• Net Profit/ Total Assets

14
General Valuation Approaches

• Comparable Publicly-Held Companies
• Present Value of Future Cash Flows
• Replacement Value
• Book Value
• Adjust book value (depreciation, unsellable
  intangible assets, fair market value)

15
General Valuation Approaches

• Earnings Approach
• Weighing recent years earnings after adjusting
  for extraordinary
• Factor Approach
• Similar to Earnings Approach
• Weight earnings, dividend-paying capacity, book
  value
• Liquidation Value
• Lowest value

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General Valuation Method

• ( of VC Investment) (VC investment
  multiple)
• VC Ownership (Projected Profits in 5 years)
  (P/E multiple of
  comparable company)
• (Earnings) (Earnings Multiple)
• Present Value (1i)n
• Initial Funding
• Investors share Present Value

17
Valuation

• Internet Companies
• Due Diligence
• Market
• Finances
• Management Team

18
Deal Structure

• Venture Capitalist needs
• Rate of return
• Timing and form of return
• Amount of control
• Perception of risk

• Entrepreneur needs
• Control
• Amount of funding
• Goals