Informal Risk Capital, Venture Capital, Chapter 12 Informal Risk Capital, Venture Capital, and Going Public McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Financing the Business Criteria for evaluating appropriateness of financing alternatives: Amount and timing of funds required. Projected company sales and growth. Three types of funding: Early stage financing. Development financing. Acquisition financing.

Table 12.1 - Stages of Business Development Funding

Informal Risk Capital / Business Angels It consists of a virtually invisible group of wealthy investors (business angels). Investments range between $10,000 to $500,000. Provides funding, especially in start-up (first-stage) financing. Contains the largest pool of risk capital in the United States.

Table 12.2 - Characteristics of Informal Investors

Table 12.2 - Characteristics of Informal Investors (cont.)

Venture Capital Nature of Venture Capital A long-term investment discipline, usually occurring over a five-year period. The equity pool is formed from the resources of wealthy limited partners. Found in: Creation of early-stage companies. Expansion and revitalization of businesses. Financing of leveraged buyouts of existing divisions of major corporations or privately owned businesses. Venture capitalist takes an equity participation in each of the investments.

Figure 12.1 - Types of Venture-Capital Firms

Figure 12.3 - Percentage of Venture Dollars Raised by Stage in 2008

Venture Capital (cont.) Venture-Capital Process Objective of a venture-capital firm - Generation of long-term capital appreciation through debt and equity investments. Criteria for committing to venture: Strong management team. A unique product and/or market opportunity. Business opportunity must show significant capital appreciation.

Figure 12.4 - Venture-Capital Financing: Risk and Return Criteria

Venture Capital (cont.) Venture-capital process can be broken down into four primary stages: Stage I: Preliminary screening – Initial evaluation of the deal. Stage II: Agreement on principal terms - Between entrepreneur and venture capitalist. Stage II: Due diligence - Stage of deal evaluation. Stage IV: Final approval - Document showing the final terms of the deal.

But which one will you pick? https://www.youtube.com/watch?v=Pnvg1Jgh_dk

Valuing Your Company Factors in Valuation Nature and history of business. Economic outlook- general and industry. Comparative data. Book (net) value. Future earning capacity. Dividend-paying capacity. Assessment of goodwill/intangibles. Previous sale of stock. Market value of similar companies’ stock.

Valuing Your Company (cont.) Ratio Analysis Serves as a measure of financial strengths and weaknesses of the venture but should be used with caution. It is typically used on actual financial results. Provides a sense of where problems exist in the pro forma statements.

Valuing Your Company (cont.) General Valuation Approaches Assessment of comparable publicly held companies and the prices of these companies’ securities. Present value of future cash flow. Replacement value. Book value. Earnings approach. Factor approach. Liquidation value.

Valuing Your Company (cont.)

Table 12.7 - Steps in Valuing Your Business and Determining Investors’ Share