12-1

12-2

ChapterChapter1212

Informal Risk CapitalInformal Risk CapitalAnd Venture CapitalAnd Venture Capital

12-3

Financing The BusinessFinancing The Business

Early-Stage FinancingEarly-Stage Financing Seed- Prove Concepts/FeasibilitySeed- Prove Concepts/Feasibility

Start-Up- Develop Initial Products For Start-Up- Develop Initial Products For

Commercial SalesCommercial Sales

Expansion/Development Expansion/Development

Funding- Support Initial GrowthFunding- Support Initial Growth

Acquisition Financing (LBOs)Acquisition Financing (LBOs)

12-4

Risk-Capital MarketsRisk-Capital Markets

Informal-Risk Capital- Business Informal-Risk Capital- Business Angels Who Are Individual Angels Who Are Individual InvestorsInvestors

Venture Capital- Money Raised By Venture Capital- Money Raised By Venture Capitalists To Invest, Venture Capitalists To Invest, Equity ParticipationEquity Participation

Public-Equity MarketsPublic-Equity Markets

12-5

Venture Capital FirmsVenture Capital Firms

Private Venture Capital- General & Limited Private Venture Capital- General & Limited PartnersPartners

Small Business Investment Company Small Business Investment Company (SBIC)(SBIC)

Industry Sponsored:Industry Sponsored: Banks/Financial InstitutionsBanks/Financial Institutions Non-Financial CompaniesNon-Financial Companies

State Government SponsoredState Government SponsoredUniversity SponsoredUniversity Sponsored

12-6

Venture CapitalistsVenture Capitalists

1.1. LocatingLocating

2.2. Approaching- Select Approaching- Select

Right OneRight OneA.A. Referred Referred

B.B. IntroductionIntroduction

C.C. Don’t “Shop” ItDon’t “Shop” It

D.D. Good Oral PresentationGood Oral Presentation

12-7

Venture DollarsVenture Dollars Invested Per DealInvested Per Deal

0

2

4

6

8

10

12

14

16

18

1994 1995 1996 1997 1998 1999 2000 2001 2002

In $ BillionsIn $ Billions

12-8

Venture Investments StageVenture Investments Stage

0

10000

20000

30000

40000

50000

60000

70000

1994 1995 1996 1997 1998 1999 2000 2001 2002

Startup/Seed Early Stage Expansion Later Stage

In $ MillionsIn $ Millions

12-9

Venture CapitalVenture Capital Investment Criteria Investment Criteria

Strong Management TeamStrong Management Team

Product/Market Product/Market Opportunity UniqueOpportunity Unique

Have Significant Capital Have Significant Capital Appreciation- 40 to 60%Appreciation- 40 to 60%

12-10

Venture Capital ProcessVenture Capital Process

1.1. Establish Philosophy & Establish Philosophy & Investment ObjectivesInvestment Objectives

2.2. StagesStagesA.A. Preliminary Screening- Business Preliminary Screening- Business

PlanPlan

B.B. Agreement on Principal TermsAgreement on Principal Terms

C.C. Due DiligenceDue Diligence

12-11

Company Valuation FactorsCompany Valuation Factors

1)1) Economic Outlook- General & IndustryEconomic Outlook- General & Industry2)2) Comparative DataComparative Data3)3) Book (Net) ValueBook (Net) Value4)4) Future Earning CapacityFuture Earning Capacity5)5) Dividend-Paying CapacityDividend-Paying Capacity6)6) Assess Goodwill/IntangiblesAssess Goodwill/Intangibles7)7) Previous Sale Of StockPrevious Sale Of Stock8)8) Market Value Of Similar Companies’ Market Value Of Similar Companies’

StockStock

12-12

Ratio Analysis- LiquidityRatio Analysis- Liquidity

Current AssetsCurrent AssetsCurrent LiabilitiesCurrent Liabilities ==

108,050108,05040,50040,500 == 2.67 Times2.67 Times

Current RatioCurrent Ratio

Current Assets - InventoryCurrent Assets - Inventory

Current LiabilitiesCurrent Liabilities==

108,050 – 10,450108,050 – 10,450

40,50040,500== 2.40 Times2.40 Times

Acid Test RatioAcid Test Ratio

12-13

Ratio Analysis- ActivityRatio Analysis- Activity

Accounts ReceivableAccounts ReceivableAverage Daily SalesAverage Daily Sales ==

46,00046,000995,000/360995,000/360 == 17 Days17 Days

Average Collection PeriodAverage Collection Period

Cost of Goods SoldCost of Goods SoldInventoryInventory ==

645,000645,00010,45010,450 == 61.7 Times61.7 Times

Inventory TurnoverInventory Turnover

12-14

Ratio Analysis- LeverageRatio Analysis- Leverage

Total LiabilitiesTotal LiabilitiesTotal AssetsTotal Assets

== 249,700249,700308,450308,450

81%81%

Debt RatioDebt Ratio

==

Total LiabilitiesTotal LiabilitiesStockholder’s EquityStockholder’s Equity

249,700249,70058,75058,750

4.25 Times4.25 Times

Debt to EquityDebt to Equity

====

12-15

Ratio Analysis- ProfitabilityRatio Analysis- Profitability

Net ProfitNet ProfitNet SalesNet Sales

8,7508,750995,000995,000

0.88%0.88%

Net Profit MarginNet Profit Margin====

Net ProfitNet ProfitTotal AssetsTotal Assets

8,7508,750200,400200,400

4.4 %4.4 %

Return on InvestmentReturn on Investment

====

12-16

General Valuation ApproachesGeneral Valuation Approaches

Used To Determine Worth Of CompanyUsed To Determine Worth Of CompanyPresent Value Of Future Cash Flows- Present Value Of Future Cash Flows-

Based On Future Sales & ProfitsBased On Future Sales & ProfitsReplacement Value- Cost Of Replacing Replacement Value- Cost Of Replacing

AssetsAssetsBook Value- Net Balance Sheet Value Of Book Value- Net Balance Sheet Value Of

AssetsAssetsEarnings- Based on Present & Future Earnings- Based on Present & Future

EarningsEarningsFactor Approach- Uses Earnings, Book Factor Approach- Uses Earnings, Book

Value & Dividend-Paying CapacityValue & Dividend-Paying CapacityLiquidation Value- Value If Everything SoldLiquidation Value- Value If Everything Sold

12-17

Venture Capital Valuation- Venture Capital Valuation- Based on Required ReturnBased on Required Return

VC $ Investment X VC Investment Multiple DesiredVC $ Investment X VC Investment Multiple DesiredCompany’s Projected Profit In Year 5 X Company’s Projected Profit In Year 5 X

PE Multiple of Similar CompanyPE Multiple of Similar Company

12-18

Venture Capitalist’sVenture Capitalist’s Factors In Pricing A DealFactors In Pricing A Deal

ReturnReturnAmount of Money Amount of Money

Now/LaterNow/LaterQuality of DealQuality of DealQuality of TeamQuality of TeamAmount Amount

Entrepreneur is Entrepreneur is InvestingInvesting

Company’s Future Company’s Future ProspectsProspects

Upside PotentialUpside PotentialDownside RiskDownside RiskInvestment Investment

CollateralCollateralLiquidityLiquidityExit StrategyExit Strategy