chapter 12 informal risk capital, venture capital, and going public mcgraw-hill/irwin copyright ©...
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Chapter 12Informal Risk Capital, Venture Capital,
and Going Public
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
12-2
Financing the Business
• Criteria for evaluating financing alternatives:• Amount and timing of funds required• Projected company sales and growth
12-3
Table 12.1 - Stages of Business Development Funding
12-4
Financing the Business
• Risk capital markets: • Provide debt and equity to nonsecure financing
situations• Types of risk capital markets• Informal risk capital market: Consists mainly of
individuals (business angels)• Venture-capital market: Consists of formal firms• Public-equity market: Consists of publicly owned stocks
of companies
12-5
Informal Risk Capital
• Business angels• Individuals: educated, experienced in startups,
expect to play an active role in your venture• Investments range: $10,000 to $500,000• Provides first-stage financing (<5 year old firms)
12-6
Table 12.2 - Characteristics of Informal Investors
12-7
Venture Capital Market
• Venture capital firms• Invest in:• Long-term capital appreciation via debt and equity• Early-stage, expansion/revitalization, leveraged buyouts
• Decision criteria:• Strong management team• Unique product and/or market opportunity• Significant capital appreciation
• Process:• Preliminary screening, principal terms, due diligence,
final deal
12-8
Figure 12.4 - Venture-Capital Financing: Risk and Return Criteria
12-9
Valuing Your Company
• General valuation approaches• Present value of future cash flow: Valuing a company
based on its future sales and profits• Replacement value: Cost of replacing all assets of a
company• Book value: Indicated worth of the assets of a company• Earnings approach: Determining the worth of a company
by looking at its present and future earnings• Factor approach: Using the major aspects of a company to
determine its worth• Liquidation value: Worth of a company if everything was
sold today
12-10
Valuing Your Company
• General valuation method
12-11
Valuing Your Company
• Nonmonetary aspects that affect valuation• Nature and history of business• Economic outlook• Dividend-paying capacity• Assessment of goodwill/intangibles• Previous sale of equity• Market value of similar companies’ stock• Financial ratio: measure financial strengths and
weaknesses of the venture
12-12
Valuing Your Company
• Liquidity ratios
• Activity ratios
Current assetsCurrent ratio =
Current liabilities
Current assets InventoryAcid test ratio =
Current liabilities
Accounts recievableActivity collection period =
Average daily sales
Cost of goods soldInventory turnover =
Inventory
12-13
Valuing Your Company
• Leverage ratios
• Profitability ratios
Total liabilitiesDebt ratio =
Total assets
Total liabilitiesDebt to equity =
Stockholder's equity
Net profitNet profit margin =
Net sales
Net profitReturn on investment =
Total assets
12-14
Deal Structure
• Investors care about:• Rate of return• Timing and form of return• Amount of control desired• Perception of risks
• Entrepreneurs care about:• Degree and mechanisms of control• Amount of financing needed• Goals for the particular firm
12-15
Going Public
• Selling some part of the company by registering with the Securities and Exchange Commission (SEC)
• Provides the company with:• Financial resources• A relatively liquid investment vehicle
• Initial public offering:The first public registration and sale of a company’s stock
12-16
Table 12.8 - Advantages and Disadvantages of Going Public
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