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  1. 1. What is Venture Capital/Private Equity? <ul><li>Venture capital is a subset of private equity and </li></ul><ul><li>refers to equity investments made for the launch, </li></ul><ul><li>early development, or expansion of a business </li></ul><ul><li>Among different countries, there are variations in </li></ul><ul><li>what is meant by venture capital and private equity </li></ul><ul><li>In Europe, these terms are generally used </li></ul><ul><li>interchangeably and venture capital thus includes </li></ul><ul><li>management buy-outs and buy-ins (MBO/MBIs). </li></ul><ul><li>This is in contrast to the US, where MBO/MBIs are </li></ul><ul><li>not classified as venture capital. </li></ul>
  2. 2. CONTD.. <ul><li>Private equity provides equity capital to enterprises </li></ul><ul><li>not quoted on a stock market </li></ul><ul><li>Private equity can be used to develop new products </li></ul><ul><li>and technologies, to expand working capital, to </li></ul><ul><li>make acquisitions, or to strengthen a company's </li></ul><ul><li>balance sheet. </li></ul><ul><li>It can also resolve ownership and management </li></ul><ul><li>issues - a succession in family-owned companies, or </li></ul><ul><li>the buy-out or buy-in of a business by experienced </li></ul><ul><li>managers may be achieved using private equity </li></ul><ul><li>funding. </li></ul>
  3. 3. Why companies need financing? <ul><li>For start-ups or growing companies, as well as those </li></ul><ul><li>facing a major change, financing is one of the key </li></ul><ul><li>business issues. </li></ul><ul><li>New capital is needed e.g. for </li></ul><ul><li>1. Financing of product development </li></ul><ul><li>2. Financing of market penetration </li></ul><ul><li>3. Financing of investments </li></ul><ul><li>4. Working capital financing to secure operative </li></ul><ul><li>continuity </li></ul><ul><li>5. Maintaining liquidity to be able to cover daily </li></ul><ul><li>payments </li></ul>
  4. 4. CONTD.. <ul><li>During their start-up, growth and expansion stages, </li></ul><ul><li>the companies are often faced with the fact that the </li></ul><ul><li>incoming cash flow is not sufficient for the </li></ul><ul><li>operations. The company's cumulative cash flow is </li></ul><ul><li>negative. The time needed for turning the company's </li></ul><ul><li>cash flow positive varies considerably </li></ul><ul><li>A long product development stage and slow market </li></ul><ul><li>penetration prolong the negative cash flow period. </li></ul><ul><li>The company can have a negative cash flow for </li></ul><ul><li>years, a situation that is typical in high-tech </li></ul><ul><li>branches. </li></ul>
  5. 5. Operative financing <ul><li>To bridge the deficit in operative financing, the </li></ul><ul><li>company has the following choice of available </li></ul><ul><li>measures: </li></ul><ul><li>1. to ensure that the liquidity planning has been </li></ul><ul><li>appropriate </li></ul><ul><li>2. to make the clients pay their invoices on time by </li></ul><ul><li>offering, for example, discounts for rapid payments </li></ul><ul><li>3. to intensify the collection of sales receivables </li></ul><ul><li>4. to delay the payments to suppliers within their </li></ul><ul><li>terms of payment </li></ul><ul><li>5. to maximize the sales margins to cut indirect costs </li></ul>
  6. 6. External financing <ul><li>Should these measures not be sufficient, the company has the following alternatives: </li></ul><ul><li>􀁺 to acquire equity capital (e.g. venture capital investors) </li></ul><ul><li>􀁺 to borrow capital </li></ul><ul><li>􀁺 to apply for public subsidies </li></ul>
  7. 7. The Process of acquiring Venture Capital financing <ul><li>The actual venture capital investment made in a company is </li></ul><ul><li>preceded by a thorough and selective assessment of potential </li></ul><ul><li>investment targets made by the venture capital investor. At the </li></ul><ul><li>first stage, the assessment of the investment request is based </li></ul><ul><li>on a business plan made by the company. </li></ul><ul><li>This is the stage where most of the projects (about 90 %) of all </li></ul><ul><li>proposed projects are rejected. </li></ul><ul><li>The initial assessment is made relatively rapidly and therefore </li></ul><ul><li>the company should pay attention to two aspects: the business </li></ul><ul><li>plan should be carefully prepared and the contact targeted to </li></ul><ul><li>the correct investors. A well-prepared business plan summary </li></ul><ul><li>is the best means of attracting and convincing the investor. </li></ul>
  8. 8. CONTD.. <ul><li>The central issues considered by the venture capital </li></ul><ul><li>investor at this stage are: </li></ul><ul><li>􀁺 Is the company able to conduct profitable and </li></ul><ul><li>growing business operations? </li></ul><ul><li>􀁺 Do the company executives have the necessary </li></ul><ul><li>qualities to manage the business in the various </li></ul><ul><li>development stages? </li></ul><ul><li>􀁺 Will the investor be able to obtain the desired return </li></ul><ul><li>through an increase in the company's net worth? </li></ul>
  9. 9. CONTD.. <ul><li>Besides the company's business plan, the venture </li></ul><ul><li>capital investor will assess the compatibility of the </li></ul><ul><li>investment request against its own investment </li></ul><ul><li>strategy </li></ul><ul><li>􀁺 The decisive investment strategy criteria may be </li></ul><ul><li>company size, development stage, branch or </li></ul><ul><li>geographical location. </li></ul><ul><li>􀁺 Contacts directed to the correct investors at an early </li></ul><ul><li>stage of the process will save time and diminish the </li></ul><ul><li>probability of negative answers. </li></ul>
  10. 10. CONTD.. <ul><li>Should the investor decide that the </li></ul><ul><li>investment request meets his criteria, the </li></ul><ul><li>following step is a meeting arranged with the </li></ul><ul><li>company management </li></ul><ul><li>Experience has shown that about half of the remaining companies are discarded at the negotiation stage </li></ul>
  11. 11. <ul><li>The third stage, or the due diligence stage, involves a thorough </li></ul><ul><li>study of the target company by the venture capital investor who </li></ul><ul><li>assesses the company on the basis of his own, weighted </li></ul><ul><li>investment criteria. </li></ul><ul><li>􀁺 The preparedness of the company management to launch and </li></ul><ul><li>developed the business in question is generally seen as the </li></ul><ul><li>most important criterion. </li></ul><ul><li>􀁺 Other vital issues include the size and development of the </li></ul><ul><li>company's target market, the competitiveness of the company's </li></ul><ul><li>product and technology as well as the capital required by the </li></ul><ul><li>business at the actual investment stage and the eventual </li></ul><ul><li>additional investment needs. </li></ul>
  12. 12. CONTD.. <ul><li>During the second and third stage of the assessment </li></ul><ul><li>process, the investor determines the value of the </li></ul><ul><li>company. Once the entrepreneur and the investor </li></ul><ul><li>have agreed on the value, the investor's future share </li></ul><ul><li>of the company is determined. </li></ul><ul><li>􀁺 The entry valuation of investor will depend on factors </li></ul><ul><li>such as investors return expectations, propotion of </li></ul><ul><li>the company that the management will give up to </li></ul><ul><li>attract the investments and the view of the </li></ul><ul><li>opportunity for new concept, product or service </li></ul>
  13. 13. CONTD.. <ul><li>The intention is to liquidate the shareholding in early </li></ul><ul><li>phase companies after 4-8 years and in companies </li></ul><ul><li>with follow-on funding after 1-3 years </li></ul><ul><li>􀁺 In the end, the investment is made in about 3 to 4 % </li></ul><ul><li>cases of all received investment requests. The </li></ul><ul><li>parties finally make a shareholder agreement to </li></ul><ul><li>establish practical operating rules. </li></ul><ul><li>􀁺 VC’s exit could be anything between liquidation and </li></ul><ul><li>IPO </li></ul>
  14. 14. Stages of Investments <ul><li>Early stage companies may have proprietary technology or </li></ul><ul><li>intellectual property that has the potential to be exploited on a </li></ul><ul><li>global scale. The technology or lead product is usually beyond </li></ul><ul><li>proof of principle stage </li></ul><ul><li>􀁺 Mid-stage companies may have strong pipeline of technologies </li></ul><ul><li>and products, which has been developed by research and </li></ul><ul><li>management teams with scientific and commercial credibility </li></ul><ul><li>􀁺 Later stage companies have operational and corporate finance </li></ul><ul><li>skills ideally positioned and company may need investments to </li></ul><ul><li>precipitate consodilations. Companies at this stage are within </li></ul><ul><li>12 to 18 months of an IPO. </li></ul>
  15. 15. VC’s contribution to entrepreneur <ul><li>In addition to money, professional VC as a shareholder bring </li></ul><ul><li>strong industry, operational, financial and investment banking </li></ul><ul><li>skills to the partnership with the target company </li></ul><ul><li>􀁺 Through the VC’s expertise and network the portfolio </li></ul><ul><li>companies could gain access to: </li></ul><ul><li>a) follow-on capital through venture capital ties </li></ul><ul><li>b) knowledge of partnership opportunities in multiple markets </li></ul><ul><li>c) in-depth operational and management experience’ </li></ul><ul><li>d) access to high-quality management teams </li></ul><ul><li>e) ties to the investment banking community </li></ul>
  16. 16. CONTD.. <ul><li>VC adds the most value by assisting in the </li></ul><ul><li>creation of the best possible team to manage </li></ul><ul><li>and supervise the target company </li></ul><ul><li>􀁺 Management assessment is one of the major </li></ul><ul><li>tasks to be carried out by the venture capital </li></ul><ul><li>before deciding to invest </li></ul>
  17. 17. Ten Questions Your Business Plan Should Answer From The VC’s Point Of View <ul><li>1. Where is the company now? </li></ul><ul><li>2. What is your product or service? </li></ul><ul><li>3. What is your market? </li></ul><ul><li>4. How will you reach the market? </li></ul><ul><li>5. Who will you be competing against? </li></ul><ul><li>6. How will your product be produced? </li></ul><ul><li>7. Who are the people? </li></ul><ul><li>8. What are your financial projections? </li></ul><ul><li>9. How much money will you need? </li></ul><ul><li>10. What are the risks? </li></ul>