Chapter 12
Informal Risk Capital, Venture Capital,
and
Going Public
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Financing the Business
• Criteria for evaluating financing alternatives:
• Amount and timing of funds required
• Projected company sales and growth
12-2
Table 12.1 - Stages of Business
Development Funding
12-3
Financing the Business
• Risk capital markets:
• Provide debt and equity to nonsecure financing
situations
• Types of risk capital markets
• Informal risk capital market: Consists mainly of
individuals (business angels)
• Venture-capital market: Consists of formal firms
• Public-equity market: Consists of publicly owned stocks
of companies
12-4
Informal Risk Capital
• Business angels
• Individuals: educated, experienced in startups,
expect to play an active role in your venture
• Investments range: $10,000 to $500,000
• Provides first-stage financing (<5 year old firms)
12-5
Table 12.2 - Characteristics of Informal
Investors
12-6
Venture Capital Market
• Venture capital firms
• Invest in:
• Long-term capital appreciation via debt and equity
• Early-stage, expansion/revitalization, leveraged buyouts
• Decision criteria:
• Strong management team
• Unique product and/or market opportunity
• Significant capital appreciation
• Process:
• Preliminary screening, principal terms, due diligence,
final deal
12-7
Figure 12.4 - Venture-Capital Financing:
Risk and Return Criteria
12-8
Valuing Your Company
• General valuation approaches
• Present value of future cash flow: Valuing a company
based on its future sales and profits
• Replacement value: Cost of replacing all assets of a
company
• Book value: Indicated worth of the assets of a
company
• Earnings approach: Determining the worth of a
company by looking at its present and future earnings
• Factor approach: Using the major aspects of a
company to determine its worth
• Liquidation value: Worth of a company if everything
was sold today
12-9
Valuing Your Company
• General valuation method
12-10
Valuing Your Company
• Nonmonetary aspects that affect valuation
•
•
•
•
•
•
•
Nature and history of business
Economic outlook
Dividend-paying capacity
Assessment of goodwill/intangibles
Previous sale of equity
Market value of similar companies’ stock
Financial ratio: measure financial strengths and
weaknesses of the venture
12-11
Valuing Your Company
• Liquidity ratios
Current ratio =
Current assets
Current liabilities
Acid test ratio =
Current assets  Inventory
Current liabilities
• Activity ratios
Activity collection period =
Inventory turnover =
Accounts recievable
Average daily sales
Cost of goods sold
Inventory
12-12
Valuing Your Company
• Leverage ratios
Total liabilities
Debt ratio =
Total assets
Total liabilities
Debt to equity =
Stockholder's equity
• Profitability ratios
Net profit margin =
Net profit
Net sales
Return on investment =
Net profit
Total assets
12-13
Deal Structure
• Investors care about:
•
•
•
•
Rate of return
Timing and form of return
Amount of control desired
Perception of risks
• Entrepreneurs care about:
• Degree and mechanisms of control
• Amount of financing needed
• Goals for the particular firm
12-14
Going Public
• Selling some part of the company by
registering with the Securities and Exchange
Commission (SEC)
• Provides the company with:
• Financial resources
• A relatively liquid investment vehicle
• Initial public offering:The first public
registration and sale of a company’s stock
12-15
Table 12.8 - Advantages and
Disadvantages of Going Public
12-16