ch 16 (Raising Capital)

Ch 16(Raising - 16 Raising Capital Key Concepts and Skills Understand the venture capital market and its role in financing new businesses

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16 Raising Capital Slide 16 - 1 Key Concepts and Skills ± Understand the venture capital market and its role in financing new businesses ± Understand how securities are sold to the public and the role of investment bankers ± Understand initial public offerings and the costs of going public ± Understand the rights offer and its effect on stock price
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Slide 16 - 2 Venture Capital ± Venture Capital (VC) z VC is financing for relatively new (often high-risk) businesses, provided by specialist venture capital firms, wealthy individuals and investment institutions. VC firms: A group of investors that pool capital and then have partners in the firm decide which companies will receive financing. z Roles of venture capitalists In addition to providing financing, venture capitalists often actively participate in running the firm, providing the benefit of experience with previous start-ups as well as general business expertise. z Returns on VC investment are realized when: (1) the company is sold, or (2) when the company goes public. Slide 16 - 3 Venture Capital ± Some Facts about VC z Venture capital financing is usually available in stages and is contingent on specified goals being met. z For every 10 first-stage venture capital investments, only two or three may survive as successful, self-sufficient businesses, and only one may pay off big. z Don’t shy away from uncertainty; accept a low probability of success. z If the developing business is going well, it is time for the original investors to cash in by selling stock to the investing public.
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Raising Capital by Selling Securities ± Methods of Selling Securities The basic procedure for selling debt and equity securities by firms to the investing public are essentially the same. So we focus on equity issuing. z Public Issues (our main focus) New securities are sold to the public , in which investment banks are involved and there is a underwriting process. Private Placements New securities are sold to no more than a couple of dozen investors (including institutions such as insurance companies and pension funds). Advantage: Avoid costly procedures associated with the registration requirements (with the SEC) that are a part of public issues. Drawback: Limited marketability (small number of investors involved) Slide 16 - 5 ± Some Terms z General cash offer; rights offer Cash offer : An issue of securities offered for sale to general public Rights offer : An issue of securities offered to existing shareholders z IPOs; SEOs Initial public offering (IPO): A company’s first equity issue made available to the public. With the IPO, the formerly privately owned company becomes public (which is called going public). Seasoned equity offering (SEO):
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This note was uploaded on 11/07/2010 for the course FINANCE fina1003 taught by Professor Zhoux during the Spring '10 term at HKU.

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Ch 16(Raising - 16 Raising Capital Key Concepts and Skills Understand the venture capital market and its role in financing new businesses

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