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sba guide to venture capital

sba guide to venture capital - U.S Small Business...

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U.S. Small Business Administration FM-5 A VENTURE CAPITAL PRIMER FOR SMALL BUSINESS LaRue Tone Hosmer Professor and Chairman Policy and Control Graduate School of Business Administration The University of Michigan Ann Arbor, Michigan Financial Management Series ______________________________________________________________________________ No part may be reproduced, transmitted or transcribed without permission of the author. SBA retains and irrevocable, worldwide, nonexclusive royalty-free, unlimited license to use this copyrighted material. While we consider the contents of this publication to be of general merit, its sponsorship by the U.S. Small Business Administration does not necessarily constitute an endorsement of the views and opinions of the authors or the products and services of the companies with which they are affiliated. All of SBA's programs and services are extended to the public on a nondiscriminatory basis. ______________________________________________________________________________ TABLE OF CONTENTS INTRODUCTION WHAT VENTURE CAPITAL FIRMS LOOK FOR ELEMENTS OF A VENTURE CAPITAL PROPOSAL PROVISIONS OF THE INVESTMENT PROPOSAL
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TYPES OF VENTURE CAPITAL FIRMS THE IMPORTANCE OF FORMAL FINANCIAL PLANNING APPENDIX ______________________________________________________________________________ INTRODUCTION Small businesses never seem to have enough money. Bankers and suppliers, naturally, are important in financing small business growth through loans and credit, but an equally important source of long term. growth capital is the venture capital firm. Venture capital financing may have an extra bonus, for if a small firm has an adequate equity base, banks are more willing to extend credit. This Aid discusses what venture capital firms look for when they analyze a company and its proposal for investment, the kinds of conditions venture firms may require in financing agreements, and the various types of venture capital investors. It stresses the importance of formal financial planning as the first step to getting venture capital financing. ______________________________________________________________________________ WHAT VENTURE CAPITAL FIRMS LOOK FOR One way of explaining the different ways in which banks and venture capital firms evaluate a small business seeking funds, put simply, is: Banks look at its immediate future, but are most heavily influenced by its past. Venture capitalists look to its longer run future. To be sure, venture capital firms and individuals are interested in many of the same factors that influence bankers in their analysis of loan applications from smaller companies. All financial people want to know the results and ratios of past operations, the amount and intended use of the needed funds, and the earnings and financial condition of future projections. But venture capitalists look much more closely at the features of the product and the size of the market than do commercial banks. Banks are creditors. They're interested in the product/market position of the company to the extent they look for assurance that this service or product can provide steady sales and generate sufficient cash flow to repay the loan. They look at projections to be certain that owner/managers have done their homework.
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