Informal Risk Capital

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12
Chapter
Informal Risk Capital And Venture Capital
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Financing The Business

• Early-Stage Financing
• Seed- Prove Concepts/Feasibility
• Start-Up- Develop Initial Products For Commercial
  Sales
• Expansion/Development Funding- Support Initial
  Growth
• Acquisition Financing (LBOs)

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Risk-Capital Markets

• Informal-Risk Capital- Business Angels Who Are
  Individual Investors
• Venture Capital- Money Raised By Venture
  Capitalists To Invest, Equity Participation
• Public-Equity Markets

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Venture Capital Firms

• Private Venture Capital- General Limited
  Partners
• Small Business Investment Company (SBIC)
• Industry Sponsored
• Banks/Financial Institutions
• Non-Financial Companies
• State Government Sponsored
• University Sponsored

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Venture Capitalists

• Locating
• Approaching- Select Right One
• Referred
• Introduction
• Dont Shop It
• Good Oral Presentation

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Venture Dollars Invested Per Deal
In Billions
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Venture Investments Stage
In Millions
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Venture Capital Investment Criteria

• Strong Management Team
• Product/Market Opportunity Unique
• Have Significant Capital Appreciation- 40 to 60

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Venture Capital Process

• Establish Philosophy Investment Objectives
• Stages
• Preliminary Screening- Business Plan
• Agreement on Principal Terms
• Due Diligence

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Company Valuation Factors

• Economic Outlook- General Industry
• Comparative Data
• Book (Net) Value
• Future Earning Capacity
• Dividend-Paying Capacity
• Assess Goodwill/Intangibles
• Previous Sale Of Stock
• Market Value Of Similar Companies Stock

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Ratio Analysis- Liquidity
Current Ratio
Current Assets Current Liabilities
108,050 40,500


2.67 Times
Acid Test Ratio

Current Assets - Inventory Current Liabilities
108,050 10,450 40,500

2.40 Times
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Ratio Analysis- Activity
Average Collection Period
Accounts Receivable Average Daily Sales
46,000 995,000/360


17 Days
Inventory Turnover
Cost of Goods Sold Inventory
645,000 10,450


61.7 Times
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Ratio Analysis- Leverage
Debt Ratio
Total Liabilities Total Assets
249,700 308,450


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Debt to Equity
Total Liabilities Stockholders Equity
249,700 58,750


4.25 Times
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Ratio Analysis- Profitability
Net Profit Margin
Net Profit Net Sales
8,750 995,000


0.88
Return on Investment
Net Profit Total Assets
8,750 200,400


4.4
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General Valuation Approaches

• Used To Determine Worth Of Company
• Present Value Of Future Cash Flows- Based On
  Future Sales Profits
• Replacement Value- Cost Of Replacing Assets
• Book Value- Net Balance Sheet Value Of Assets
• Earnings- Based on Present Future Earnings
• Factor Approach- Uses Earnings, Book Value
  Dividend-Paying Capacity
• Liquidation Value- Value If Everything Sold

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Venture Capital Valuation- Based on Required
Return
VC Investment X VC Investment Multiple
Desired Companys Projected Profit In Year 5 X
PE Multiple of Similar Company
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Venture Capitalists Factors In Pricing A Deal

• Return
• Amount of Money Now/Later
• Quality of Deal
• Quality of Team
• Amount Entrepreneur is Investing

• Companys Future Prospects
• Upside Potential
• Downside Risk
• Investment Collateral
• Liquidity
• Exit Strategy