Informal Risk Capital &
Venture Capital
Financing the Business
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Stages for Financing
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Early-stage financing
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Development-stage financing
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Seed capital
Start-up financing
Second stage
Third stage
Fourth stage
Acquisition-financing
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Traditional acquisitions
Leveraged buyouts
Public-equity
Risk-Capital Markets
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Informal risk capital
Venture-capital market
Public equity
Informal Risk & Capital Markets
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Business angels
Usually start-up
Hard to calculate exact size
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Characteristics
Industries
 Investment size
 Time frame
 Finding them
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Venture Capital
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Nature of Venture Capital
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Definition
General partners
Limited partners
Length of investment
Overview of Venture Capital
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1946- American Research and
Development Corporation
1958- Small Business Investment Act
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1960s= 585 SBICs Today= 360
Late 1960s- Private Venture Capital Firms
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Today=980
Overview of Venture Capital
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Corporations
State-sponsored Venture Capital
University-sponsored Venture Capital
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Characteristics
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Size
Industries
Stages of business being funded
Geographic location
VC Process
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What do venture capitalists want?
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Basic Goal
Trusting relationship with entrepreneur
Business criteria
Strong management team
 Unique Product/MKT Opportunity
 Good ROI
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Early-stage v. late-stage
VC Process
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Portfolio establishment
Four stages
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Preliminary
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Agreement on principal terms
Due diligence
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Evaluate business plan
Background information
Longest stage
Detail-oriented
Final approval
VC Process
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Where to find venture capitalists?
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Member lists
Referrals
Approaching venture capitalists
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Call to check specialization
Send plan and short letter
General rules
Valuing the Company
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Eight Factors
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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
Ratio Analysis
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Liquidity Ratios
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Current Ratio
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Acid Test Ratio
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Current Assets/ Current Liabilities
(Current Assets-Inventory)/ Current Liabilities
Activity Ratios
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Average Collection Period
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Accounts Receivable/ Average Daily Sales
Inventory Turnover
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Net Profit/ Total Assets
Ratio Analysis
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Leverage Ratios
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Debt Ratio
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Debt-to-Equity Ratio
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Total Liability/ Total Assets
Total Debt/ Total Equity
Profitability Ratios
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Net Profit Margins
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Net Profit/ Net Sales
Return on Investment
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Net Profit/ Total Assets
General Valuation Approaches
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Comparable Publicly-Held Companies
Present Value of Future Cash Flows
Replacement Value
Book Value
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Adjust book value (depreciation, unsellable
intangible assets, fair market value)
General Valuation Approaches
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Earnings Approach
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Weighing recent years’ earnings after adjusting for
extraordinary
Factor Approach
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Similar to Earnings Approach
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Weight earnings, dividend-paying capacity, book value
Liquidation Value
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Lowest value
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=
(1+i)^n
Investor’s share=
Initial Funding
Present Value
Valuation
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Internet Companies
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Due Diligence
Market
 Finances
 Management Team
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Deal Structure
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Venture Capitalist
needs:
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Rate of return
Timing and form of
return
Amount of control
Perception of risk
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Entrepreneur needs:
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Control
Amount of funding
Goals