Informal Risk Capital, Venture Capital, and Going Public 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

Table 12.1 - Stages of Business Development Funding

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

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)

Table 12.2 - Characteristics of Informal Investors

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

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

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

Valuing Your Company General valuation method

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

Valuing Your Company Liquidity ratios Activity ratios

Valuing Your Company Leverage ratios Profitability ratios

Deal Structure Investors care about: Entrepreneurs 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

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

Table 12.8 - Advantages and Disadvantages of Going Public