Informal risk capital and Venture capital

Module 7

Financing the Business

Criteria for evaluating appropriateness of financing alternatives:
Amount and timing of funds required. Projected company sales and growth.

Three types of funding:

Early stage financing. Development financing. Acquisition financing.

Table 12.1 - Stages of Business Development Funding

Informal Risk Capital

It consists of a virtually invisible group of wealthy investors (business angels). Investments range between $10,000 to $500,000. Provides funding, especially in start-up (firststage) financing. Contains the largest pool of risk capital in the United States.

Table 12.2 - Characteristics of Informal Investors

Table 12.2 - Characteristics of Informal Investors (cont.)

Venture Capital
Nature of Venture Capital
A long-term investment discipline, usually occurring over a five-year period. The equity pool is formed from the resources of wealthy limited partners. Found in:
Creation of early-stage companies. Expansion and revitalization of businesses. Financing of leveraged buyouts of existing divisions of major corporations or privately owned businesses.

Venture capitalist takes an equity participation in each of the investments.

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

State-sponsored Venture Capital

Venture Capital

(cont.)

Venture-Capital Process
Objective of a venture-capital firm - Generation of long-term capital appreciation through debt and equity investments. Criteria for committing to venture:
Strong management team. A unique product and/or market opportunity. Business opportunity must show significant capital appreciation.

Venture-Capital Financing: Risk and Return Criteria

Venture Capital

(cont.)

Venture-capital process can be broken down into four primary stages:

Stage I: Preliminary screening Initial evaluation of the deal. Stage II: Agreement on principal terms - Between entrepreneur and venture capitalist. Stage II: Due diligence - Stage of deal evaluation. Stage IV: Final approval - Document showing the final terms of the deal.

Locating Venture Capitalists

Venture capitalists tend to specialize either geographically by industry or by size and type of investment. Entrepreneur should approach only those that may have an interest in the investment opportunity. Most venture capital firms belong to the National Venture Capital Association.

Approaching a Venture Capitalist :Guidelines for Dealing with Venture Capitalists.

Guidelines for Dealing with Venture Capitalists (cont.)