5523 Week 2 Slides.pdf - FINS5523 Alternative Asset Classes Weeks 2/3 – Fund Raising and Fund Structure I 1 Review Questions Why do investors allocate

5523 Week 2 Slides.pdf - FINS5523 Alternative Asset Classes...

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FINS5523 Alternative Asset Classes Weeks 2/3 – Fund Raising and Fund Structure I 1
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2 Review Questions Why do investors allocate funds to private equity portfolios? Does the capital gap arise mainly because venture capital investments have high risk? If you had to come up with a textbook definition of venture capital funds, what would that be?
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3 Lecture Outline Forms of Private Firm Financing Structure of VC Fundraising What determines the inflow into VC markets? Difficulties of first time funds Basics of funds’ cash flows and incentive structures 3
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Forms of Financing of Private Firms 4
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Sources of Finance for Growth Firms 5
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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. 6
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Sources of Equity Finance First stage: Bootstrapping Why firms should NOT obtain external funds too early? The high costs of external finance at early stages Incentives to spend, expand and squander 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 Bootstrap capital can be used as a leverage to raise external funds 7
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8 Example – Firm tax credit Start-ups choose to stay home , SMH, July 24 th 2012 Many startups are praising the govt’s new tax credit support for R&D $1 spent on qualified R&Ds => $0.45 credit More efficient than previous support in terms of government grants A source of bootstrap funds "We ran out of the money we raised from investors and had actually had not reached our development milestones and were actually in a bit of financial trouble," "What the R&D rebate allowed us to do was spend a few more months on risky speculative development work, that we really wouldn't get investors to fund.“ Can be used as a leverage to obtain external funding "If you raise half a million dollars, you can use the tax concession to bring in more money and make that go further,“ "The valuations are going to be lower here (Australia) but in some sense the government grants counter that.
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