Week 2 Lecture 2 2014 - FINS3623 Venture Capital Week 2...

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FINS3623 Venture Capital Week 2 – Fund Raising and Fund Structure I 1
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2 Lecture Outline Review of Forms of Financing Equity Financing Debt Financing Overview of VC Fundraising What determines the inflow into VC markets? Difficulties of first time funds The Limited Partnership Structure Compensation in Limited Partnership 2
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Forms of Financing of Private Firms 3
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Sources of Equity Finance First stage: Bootstrapping Various sources of internal equity: Own money, savings, credit cards, personal loans, family members, tax rebates, second mortgage, etc Often a must before any other form of financing A survey finds that bootstrapping contributes to about 31% of all forms of financing Median startup capital in the US: only about $10,000 Ross Perot started EDS in 1962 with $1000 (about $5000 in today’s dollars). No real VCs at the time. Despite this EDS went public in 1968 – share price goes from $16 to$160 dollars in a matter of days. In 1984 he sold a majority stake of EDS for $2.4 billion to GM ($6.5 billion in today’s dollars). Today it is a division of HP. 4
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Sources of Equity Finance First stage: Bootstrapping Problems with obtaining external funds too early Incentives to spend, expand and squander Slower start is often a safer start No opportunity for correcting errors and poor decisions Venture capitalists are not that patient They want to exit in 5 years Outside investors can hinder the entrepreneur Outside investors often prefer the safe proven routes learnt from previous investments, while the entrepreneur may prefer experimental try-it fix-it approach in an uncertain environment By bootstrapping entrepreneur can ensure very high returns Conversely, VCs will want too much ownership at early stage = little incentive/wealth creation for entrepreneur 5
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Sources of Equity Finance Second Stage: Angel Investors/ Seed Capitalists Professional investors investing with their own funds Often wealthy individuals, with a lot of experience: E.g. investment bankers, lawyers, retired CEOs, retired scientists/engineers Investment objectives: Reaping the initial high returns by getting in early Reaping returns from value adding activities Prepare the company for venture capital funding Market for angel investments (US figures): Activity: around $12 billion in 2007 Number of investors: about 140,000 individuals Acceptance rate: vary from 10 to 20% of all proposed deals Most prominent industries: healthcare, software, and biotech 6
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Sources of Equity Finance Second Stage: Angel Investors/ Seed Capitalists Size of investment: from $50,000 - $100,000 Investment horizon: Minimum 7 years to time of listing (or sale) Average 12 years Portfolio: often less than 5 firms Key investment philosophies of modern angel investing: Involvement, not just Investing Formal screening and selectivity Maintaining strong financial resources
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