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sg15 - CH APT ER 15 RAISING CAPITAL CO NCE PTS FO R RE VIEW...

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124 CHAPTER 15 RAISING CAPITAL CONCEPTS FOR REVIEW Previously we examined the features and the risk/return characteristics of debt and equity. These attributes should be kept in mind as you study the process by which securities are issued to the public. CHAPTER HIGHLIGHTS The sale of securities to the investing public is an essential source of long-term financing. This chapter describes the means by which firms issue new debt and equity, as well as the roles played by investment bankers and venture capital firms in the financing process. I. THE FINANCING LIFE CYCLE OF A FIRM: EARLY-STAGE FINANCING AND VENTURE CAPITAL (p. 448) Start-up companies often find it difficult to raise the funds necessary to get the firm off the ground. In this section we describe the role of venture capital firms and the venture capital market in providing financing for new firms. V e n t u r e C a p i t a l (p. 448) "Venture capital" is financing for new, high-risk enterprises. Funds are obtained from institutional investors such as pension funds, as well as from individuals. Some venture capitalists provide first- stage financing , which allows the new firm's founders to get a prototype product built. Venture capitalists also provide second-stage financing to begin manufacturing and selling the product. Finally, suppliers of venture capital also are often actively involved in the operations of the firm, since they typically have a substantial amount of business experience, where the founders may not. It is not surprising, therefore, that venture capitalists often obtain a substantial ownership share in the new firm in return for their services. S o m e V e n t u r e C a p i t a l R e a l i t i e s (p. 449) Suppliers of venture capital must sift through numerous proposals and select those that appear to have the greatest chance of success. Investment opportunities are often discovered via the venture capitalist's network of contacts with inventors, lawyers, accountants, and other venture capital suppliers. C h o o s i n g a V e n t u r e C a p i t a l i s t (p. 449) Managers seeking venture capital should consider: 1. Financial strength–Does the VC have adequate financial reserves should more financing be needed? 2. Management style–How involved will the venture capitalist be in the operation of the business? 3. References–How successful has the venture capitalist been in previous business deals? 4. Contacts–Does the venture capitalist know of others (e.g., suppliers, potential customers) that could help ensure the success of the new firm? 5. Exit strategy–How will the venture capitalist cash out of the business?
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125 II. SELLING SECURITIES TO THE PUBLIC: THE BASIC PROCEDURE (p. 450) The Securities and Exchange Commission (SEC) is responsible for administering the Securities Act of 1933, which governs new interstate issues of securities, and the Securities Exchange Act of 1934, which governs securities already outstanding.
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