Informal Risk and Venture Capital

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Informal risk capital and VenturecapitalModule 7


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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.


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Table 12.1 - Stages of BusinessDevelopment Funding


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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 (first-

stage) financing. Contains the largest pool of risk capital in the

United States.


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Table 12.2 - Characteristics of InformalInvestors


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Table 12.2 - Characteristics of Informal Investors (cont.)


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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 ineach of the investments.


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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


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Venture-Capital Financing: Risk andReturn Criteria


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Venture-capital process can be broken down intofour 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.

Venture Capital (cont.)


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Venture capitalists tend to specialize eithergeographically by industry or by size and type of investment.

Entrepreneur should approach only those thatmay have an interest in the investmentopportunity.

Most venture capital firms belong to the National

Venture Capital Association.

Locating Venture Capitalists


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Approaching a Venture Capitalist :Guidelinesfor Dealing with Venture Capitalists.


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Guidelines for Dealing with VentureCapitalists (cont.)


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Informal Risk and Venture Capital

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