Term
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Definition
1) Risk capital primarily for private & public companies.
2) Investment in a company to finance:
a)start-up,
b)expansion,
c)survival or
d)change of ownership.
3) VC return most oftern capital gain vs dividend yield. |
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Term
| When and why is Venture Capital Needed? |
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Definition
When required:
a) critical stage in its R&D,
b) new product development
c) expanding its sales & marketing efforts.
Why:
a)Existing owners & banks can't provide all funds, due to scarcity & credit risk |
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Term
| Who are the providers of VC? |
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Definition
1) Funds provided to companies by Venture Capital (VC) or Private Equity organizations.
2) Wealthy individuals (Angels) Paul Allen, Ron Conway, Mark Andreesen
3) Corporations
Cisco, Microsoft, Google |
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Term
| General characteristics of VC |
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Definition
Main feature is that it is risk capital.
Finance provider expected to share in the profits or to bare the loss of company.
VC funds are provided as a mixture of common & preferred shares. Secured bank loans are not venture capital. |
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Term
| What are the three Categories of Venture Capital Investment? |
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Definition
1) Industry or Product
2) Investment Size
3) Investment by Stage of Business |
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Term
| What are examples of industry or product category? |
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Definition
Technology: Software, Semiconductors, Wireless, etc.
Health Care & Life Sciences: Disease areas, Devices, Healthcare IT
Emerging Technologies: Nanotechnology, Cleantech |
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Term
| What are the divisions with the investment size category? |
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Definition
Start-up funds: $250,000 to $1.5 million
Early stage: $1 to $5 million
Later stage: $10 million + |
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Term
| What divisions are there within the stages of business development? |
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Definition
Seed Capital: Primarily R&D focus, proof-of-principle, prototype development
Start-Up Capital: Product or service exists, less ‘Research’ and more ‘Development’, pilots, customer interaction initiated but no sales
Early Stage Capital: Successful Pilots, Setting up Management Structure (Finance/Sales/Marketing, etc.), Second generation of the product |
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Term
| What are three distinctions within rounds of financing? |
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Definition
New Investment: Funds invested in a company for the first time
Follow-on Investment: Further investment in the same company at a later time
Milestone based Investment: Total Investment amount approved in principle but released in instalments upon successful completion of agreed upon milestones |
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Term
| List notable items of the history of VC? |
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Definition
Origins can be traced back to merchant venturers in the 15th century.
Wealthy individuals financed expeditions by Europeans to countries such as India and the Far East.
Foundations of “venture capital” in the Western world date back to 18th century in the UK. Entrepreneurs of Industrial revolution such as Brunel and Stephenson obtained financing from wealthy individuals
The venture capital industry in the US began to develop in the late 1950s. |
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Term
| Characteristics of independent VC organizations? |
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Definition
Raise their funds from more than one source, mainly institutional investors.
No single shareholder has a dominant position in the ownership of the fund.
The funds are managed independently and the management is free to choose how the money should be invested. |
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Term
| Name two ways independent VC funds can be set-up? |
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Definition
A group of experienced VCs could seek backing from several investment institutions that invest in a fund.
A group of financial institutions could agree to set-up a fund and recruit a management team.
In both cases the fund managers decide how to invest money in business ventures |
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Term
| List five ways that VC funds are exited? |
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Definition
Stock Market Floatation
This allows the venture capitalist to sell its shares on the stock market.
Trade Sale
Company sold to a buyer.
Repurchase
VC’s investment repurchased by management.
Involuntary Exit
Company fails, and goes into receivership/liquidation.
Refinancing
Purchase of VC’s shares by a longer term investment institution. |
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Term
| How can VC returns be measured? |
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Definition
| as an average annual yield on the initial cost of the investment that can be calculated by DCF. |
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Term
| What are three different time periods in which VC returns can be measured? |
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Definition
At the time of initial evaluation
Expected return on investment.
During the term of investment
Dividends and interest received to date plus the increase (or minus decrease) in the estimated current value of the investment.
When the investment is eventually realized
Includes dividends and interest received plus the realized profit from the sale of the investment, that is its sale value minus the original investment cost. |
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Term
| What are five key elements of VC investment strategy? |
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Definition
1) Objective
2) Types of industry or business sector to invest in
3) Preferred minimum and maximum size of investment
4) Preferred stage/stages of business development
5) Deciding on a risk/return profile for the investment portfolio |
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Term
| What is industry focus primarily driven by? |
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Definition
1) investment executive's experience and expertise
2) investment executive's investment experience. |
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Term
| Returns that VCs expect from investing in ventures will be determined by: |
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Definition
1) Availability of ventures to invest in
2) Total amount of venture capital being sought out by the companies
3) Total amount of venture capital funds currently available
4) Degree of competition between VCs to support ventures |
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Term
| Characteristics of a limited partnership: |
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Definition
1) Finite lives (usually 10 years)
2) Has to return their fund’s assets to investors within a set period
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Term
| Small Business Investment Companies (SBICs): |
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Definition
| a program of federally guaranteed risk capital pools established by the US government in 1958. |
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Term
| Two forms of General Partners’ Incentive Compensation: |
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Definition
1) Management Fee that the general partners charge investors
2) The share of profits, or carried interest, that the general partners receive when the investments are liquidated |
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Term
| Strategies to ensure fund received proper attention: |
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Definition
1) Partnership agreements may prohibit VCs from raising a new fund until a set percentage of the portfolio has been invested.
2) The contract may restrict the VCs involvement in businesses outside the venture funds’ portfolio
3) Pacing requirements (minimum dollars to be invested over a period of time) |
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Term
| Strategies to raise capital for a fund without the track record? |
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Definition
1) Put your own money in.
2) Identify investors who aren’t motivated only by financial returns. Other benefits such as local economic development, etc.
3) Alliance with a well established group (VC or a Bank).
4) Recruit a lead investor to contribute a significant % (20-50% of the capital). |
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Term
| Strategies for raising capital for established funds (key questions)? |
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Definition
How much capital should be raised? In recent years, established VCs have returned money to the LPs after they realized that it was too much.
From what type of investors should the money be raised?
The right mix between high net worth individuals, institutional investors, sovereign funds, etc.
Who should be in the General Partnership? Issues of succession planning and training junior partners. |
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Term
| What are the three hallmarks of effective venture organization? |
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Definition
1) Speed of approach: Taking the deal to the finish line
2) Systemization:Process of due-diligence and investment recommendation
3) Intergenerational management: Managing the expectations of the junior partners |
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Term
| Four risks that concern financers: |
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Definition
1) Uncertainty about the future
2) Information gaps
3) “Soft” assets
4) Volatility of current market conditions |
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Term
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Definition
A measure of the distribution of possible outcomes for a company or a project
Increased uncertainty = wider distributions of potential outcomes |
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Term
| Analysis of an entrepreneurial project can: |
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Definition
Key phases of uncertainty
Yield a list of potential outcomes of each phase
Provide an assessment of the likelihood of those various outcomes. |
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Term
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Definition
human capital, patents and trademarks
key: relationships and execution
Patents and trademarks only have value when it is combined with other assets such as entrepreneur’s knowledge of particular process or technology that the patent involves |
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Term
| Overcoming four pitfalls: |
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Definition
As an entrepreneur:
1) Get a better sense of the risks in your industry and business and communicate these to investors
2) Enumerate and set clear goals and timelines to reduce information gaps
3) Communicate clearly what the firm’s assets, both hard and soft, are.
4) Think critically about financial and product market cycles and the challenges that they pose to the company’s business model |
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Term
| Questions determining wether to invest or not: |
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Definition
1) Does the market for the product exist?
2) Will the current technology be able to be developed into a commercial product? At what price?
3) What is the team? Have the scientists, engineers and management worked together before?
4) Who will fund the next steps? Why? How? |
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Term
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Definition
1) Staged financing: Contributing financial support in discrete stages over time
2) Syndication of investments: Bringing in other venture capital investors and diversifying commitments
3) Compensation contracts: Including the use of stock grants and options, particularly convertible preferred equity—that align investors’ and managers’ incentives
4) Covenants and restrictions that protect new ventures from potentially damaging decisions by entrepreneurs
5) Strategic composition of investees’ board of directors |
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Term
| Three deal screening approaches: |
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Definition
Tom Perkins, cofounder of Kleiner Perkins Caufield & Byers
Technological position of a company. Whether the new technology was superior to existing alternatives, proprietary and protectable. DEFENSIVE BARRIERS TO ENTRY
Arthur Rock, father of venture capital in the valley
Values intellectual honesty, personal integrity. QUALITY OF MANAGEMENT TEAM
Don Valentine, founder of Sequoia Capital
Assessed the market for the proposed product or service first. Is the market large and growing? Is it well defined? MARKET APPROACH |
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Term
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Definition
Low fixed salary and higher stock options and grants.
Stock usually vests over three or four years.
VCs can dilute entrepreneur’s stake in the company if a firm fails to meet specific milestones.
On the other hand incentives could be provided in terms of additional stock or accelerated vesting if the firm achieves its milestones. |
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Term
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Definition
1) Provide guidance and strategic advice about the direction of the company
2) Offer network of contacts
3) Hire and fire the senior management including the CEO. |
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