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Informal Risk Capital & Venture Capital

Informal Risk Capital & Venture Capital. Financing the Business. Stages for Financing Early-stage financing: one of the first financings obtained by a company. Seed capital: relatively small amounts to prove concepts and finance feasibility studies

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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: one of the first financings obtained by a company. • Seed capital: relatively small amounts to prove concepts and finance feasibility studies • Start-up financing: pdt devpt and initial mktg, but with no commercial sales yet, funding to actually get company operations started. • Development-stage financing: financing to rapidly expand the business • Second stage: working capital for initial growth phase, but no clear profitability or cash flow yet. • Third stage: major expansion for company with rapid sales growth, at breakeven or positive profit levels but still private company. • Fourth stage: bridge financing to prepare company for public offering.

  3. Acquisition-financing • Traditional acquisitions • Leveraged buyouts • Public-equity

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

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

  6. Venture Capital • Nature of Venture Capital • Definition • General partners • Limited partners • Length of investment

  7. 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

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

  9. VC Process • What do venture capitalists want? • Basic Goal • Trusting relationship with entrepreneur • Business criteria • Strong management team • Unique Product/MKT Opportunity • Good ROI

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

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

  12. 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

  13. 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

  14. 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

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