VENTURE CAPITAL IMPORTANT SOURCE OF EQUITY FOR HIGH GROWTH COMPANIES

“POOL OF CAPITAL, TYPICALLY ORGANIZED AS A LIMITED PARTNERSHIP, WHICH INVESTS IN COMPANIES THAT REPRESENT AN OPPORTUNITY FOR A HIGH RATE OF RETURN WITHIN 5-7 YEARS.”

BACKGROUND VENTURE CAPITAL FIRM BACKED FIRMS RESPONSIBLE FOR –3.3% OF NATION’S JOBS –7.4% OF GROSS DOMESTIC PRODUCT –ALL FOR ONLY 1% OF NATION INVEST. –“GAZELLES” (>20% GROWTH) ARE 5% OF NATION’S FIRMS; 2/3 NEW JOBS

BIG CHANGE IN FINANCING GROWING WEALTH/DISPOSABLE INCOME VERY VISIBLE HIGH TECH COMPANIES - poster children for feast-or- famine nature of venture capital RECENT SURVEY - 6/100 of high tech startups had traditional bank debt as first- round financing

VENTURE CAPITAL ROLES PURCHASE EQUITY OR HYBRID SECURITIES ASSIST IN NEW PRODUCT DEVELOPMENT FOCUS ON HIGHER RISK-RETURN COMPANIES

SAMPLE FIRMS THAT USED VENTURE CAPITAL FEDERAL EXPRESS COMPAQ SUN MICROSYSTEMS INTEL MICROSOFT

VARIABLE TRAITS OF VENTURE CAPITAL FUND RISK LENGTH OF COMMITMENT INVESTMENT ILLIQUIDITY MINIMUM $ COMMITMENT

STRATEGY OF V.C. FIRM P. 283 OF TEXT MANAGEMENT ABILITY WELL-DEFINED NICHE BUSINESS LEADING MARKET POSITION STRONG GROWTH POTENTIAL CONSOLIDATION RISK AVOIDANCE REASONABLE SELLING PRICE

EXIT OPTION 1 MERGER/ACQUISTION –MOST FREQUENT EXIT –AT LEAST 3-5 YEARS AFTER INITIAL INVESTMENT

EXIT OPTION 2 INITIAL PUBLIC OFFERING (IPO) –MOST GLAMOROUS –FUND GETS PUBLIC SHARES BUT OFTEN MAY NOT BE TRADED FOR UP TO 2 YEARS

WHAT INDUSTRIES ATTRACT VENTURE CAP. Poised for rapid growth/high profit Sustainable growth in excess of 5 years Niche or emerging markets market large enough to support in range of $100 million in company value –health care –information technology (?)

LIFE CYCLE OPTIONS FOR V.C. INVESTMENT SEED INVESTING - before the real product or company is organized –$300-3 million EARLY STAGE INVESTING - after first product development –$3 million - $20 million

V.C. CYCLE CONT. EXPANSION STAGE - beyond critical mass toward more successful firm –$20 MILLION-$100 MILLION –STAGE AT WHICH IPO OR FIRM BUYOUT EXPECTED LATER STAGE - also through exit via stock offering or buyout

EVALUATION APPROACH Uniqueness of product Will company become profitable? How will proceeds be used? Management able and willing to meet specific goals? Is there an exit strategy for equity investors?

VALUATION APPROACHES EARLY STAGE FIRMS - focus on management EXPANSION STAGE FIRMS - value = multiple of revenues LATE STAGE FIRMS - MULTIPLE OF EARNINGS

CASE STUDY VALUATIONS HOP-IN-FOODS - P BERG ELECTRONICS - P. 281 Q: COMPARE IPO FIRMS WITH FIRMS IN SAME INDUSTRY