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Informal Risk Capital Venture Capital

Financing the Business. Stages for FinancingEarly-stage financingSeed capitalStart-up financingDevelopment-stage financingSecond stageThird stageFourth stageAcquisition-financingTraditional acquisitionsLeveraged buyoutsPublic-equity. Risk-Capital Markets. Informal risk capitalVenture-cap

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Informal Risk Capital Venture Capital

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    1. Informal Risk Capital & Venture Capital

    2. Financing the Business Stages for Financing Early-stage financing Seed capital Start-up financing Development-stage financing Second stage Third stage Fourth stage Acquisition-financing Traditional acquisitions Leveraged buyouts Public-equity

    3. Risk-Capital Markets Informal risk capital Venture-capital market Public equity

    4. Informal Risk & Capital Markets Business angels Usually start-up Hard to calculate exact size Characteristics Industries Investment size Time frame Finding them

    5. Venture Capital Nature of Venture Capital Definition General partners Limited partners Length of investment

    6. Overview of Venture Capital 1946- American Research and Development Corporation 1958- Small Business Investment Act 1960s= 585 SBICs Today= 360 Late 1960s- Private Venture Capital Firms Today=980

    7. Overview of Venture Capital Corporations State-sponsored Venture Capital University-sponsored Venture Capital Characteristics Size Industries Stages of business being funded Geographic location

    8. VC Process What do venture capitalists want? Basic Goal Trusting relationship with entrepreneur Business criteria Strong management team Unique Product/MKT Opportunity Good ROI Early-stage v. late-stage

    9. VC Process Portfolio establishment Four stages Preliminary Evaluate business plan Background information Agreement on principal terms Due diligence Longest stage Detail-oriented Final approval

    10. VC Process Where to find venture capitalists? Member lists Referrals Approaching venture capitalists Call to check specialization Send plan and short letter General rules

    11. Valuing the Company Eight Factors 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

    12. Ratio Analysis Liquidity Ratios Current Ratio Current Assets/ Current Liabilities Acid Test Ratio (Current Assets-Inventory)/ Current Liabilities Activity Ratios Average Collection Period Accounts Receivable/ Average Daily Sales Inventory Turnover Net Profit/ Total Assets

    13. Ratio Analysis Leverage Ratios Debt Ratio Total Liability/ Total Assets Debt-to-Equity Ratio Total Debt/ Total Equity Profitability Ratios Net Profit Margins Net Profit/ Net Sales Return on Investment Net Profit/ Total Assets

    14. General Valuation Approaches Comparable Publicly-Held Companies Present Value of Future Cash Flows Replacement Value Book Value Adjust book value (depreciation, unsellable intangible assets, fair market value)

    15. General Valuation Approaches Earnings Approach Weighing recent years’ earnings after adjusting for extraordinary Factor Approach Similar to Earnings Approach Weight earnings, dividend-paying capacity, book value Liquidation Value Lowest value

    16. 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 Initial Funding Investor’s share= Present Value

    17. Valuation Internet Companies Due Diligence Market Finances Management Team

    18. Deal Structure Venture Capitalist needs: Rate of return Timing and form of return Amount of control Perception of risk Entrepreneur needs: Control Amount of funding Goals

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