ch15 - 1 CHAPTER 15 How Firms Raise Capital Learning...

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1 CHAPTER 15 How Firms Raise Capital Learning Objectives 1. Explain what is meant by bootstrapping when raising seed financing and why bootstrapping is important. 2. Describe the role of venture capitalists in the economy and discuss how they reduce their risk when investing in start-up businesses. 3. Discuss the advantages and disadvantages of going public and compute the net proceeds from an IPO. 4. Explain why, when underwriting new security offerings, investment bankers prefer that the securities be underpriced. Compute the total cost of an IPO. 5. Discuss the costs of bringing a general cash offer to market. 6. Explain why a firm that has access to the public markets might elect to raise money through a private placement. 7. Review some advantages of borrowing from a commercial bank rather than selling securities in financial markets, and discuss bank term loans. I. Chapter Outline 15.1 Bootstrapping A. How New Businesses Get Started 1
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2 Most businesses are started by an entrepreneur who has a vision for a new business or product and a passionate belief in the concept’s viability. The entrepreneur often fleshes out his or her ideas and makes them operational through informal discussions with people whom the entrepreneur respects and trusts, such as friends and early investors. B. Initial Funding of the Firm The process by which many entrepreneurs raise “seed” money and obtain other resources necessary to start their businesses is often called bootstrapping . The initial “seed” money usually comes from the entrepreneur or other founders. Other cash may come from personal savings, the sale of assets such as cars and boats, loans from family members and friends, and loans secured from credit cards. The seed money, in most cases, is spent on developing a prototype of the product or service and a business plan. 15.2 Venture Capital The bootstrapping period usually lasts no more than one or two years. At some point, the founders will have developed a prototype of the product and a business plan, which they can “take on the road” to seek venture capital funding to grow the business. 2
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3 Venture capitalists are individuals or firms that help new businesses get started and provide much of their early-stage financing. Individual venture capitalists, angels (or angel investors ), are typically wealthy individuals who invest their own money in emerging businesses at the very early stages in small deals. Exhibit 15.1 shows the primary sources of funds for venture capital firms from 1999 to 2004. A. The Venture Capital Industry The venture capital industry as we know it today emerged in the late 1960s with the formation of the first venture capital limited partnerships. Approximately $19 billion was invested in venture capital funds in 2009 and $23
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This note was uploaded on 04/01/2012 for the course BUSINESS 100 taught by Professor Bens during the Spring '12 term at FIU.

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ch15 - 1 CHAPTER 15 How Firms Raise Capital Learning...

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