chapter 12 - informal risk capital and venture capital
TRANSCRIPT
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