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Module VII
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Criteria for evaluating appropriateness offinancing 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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Risk capital markets provide debt and equityto non secure financing situations.
Types of risk capital markets:
Informal risk capital market. Venture-capital market.
Public-equity market.
All three can be a source of funds for stage-one financing. However, public-equity market is available only
for high-potential ventures.
Financing the Business (cont.)
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It consists of a virtually invisible group ofwealthy 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 ofInformal Investors(cont.)
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Nature of Venture Capital A long-term investment discipline, usually occurring
over a five-year period.
The equity poolis formed from the resources ofwealthy limited partners.
Found in: Creation of early-stage companies.
Expansion and revitalization of businesses.
Financing of leveraged buyouts of existing divisions ofmajor corporations or privately owned businesses.
Venture capitalist takes an equity participation in eachof the investments.
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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 capitalappreciation.
Venture Capital (cont.)
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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 finalterms of the deal.
Venture Capital (cont.)
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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.
Venture Capital (cont.)
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Table 12.6 - Guidelines for Dealingwith Venture Capitalists (cont.)
