BUSFIN 4217 Venture Capital Test One

Ventura Capital Cycle

1. Limited partners 2. VC fund 3. Portfolio companies 4. Exit investment Repeat

Homerun

10x your money

Management Fees

A charge levied by an investment manager for managing an investment fund Usually ranges from 2% to 2.5% of committed capital and is usually charged every year the fund is in operation

Mezzanine Round

A hybrid of debt and equity financing that gives the lender the right to convert to an equity interest in the company in case of default $3M-$20M

Takedown

A jargon for the initial price of a stock, bond, or other security when it is first offered in the open market

Term Sheet

A non-binding agreement or template that outlines an overview of the terms and conditions between the entrepreneur and investor

Up Round

A round of financing in which the value of a venture has increased since the previous round

Carried Interest

A share of any profits that the general partners of private equity and hedge funds receive as compensation regardless of whether they contribute any initial funds LP - 80% GP - 20%

General partner

A type of owner in a partnership who is responsible for the day-to-day operations and who has unlimited liability for any debts of the business

Series C Round

About 100-150 employees with a burn rate of of $3M-$4M a month $5M-$30M

Expense Forecasting

Cost go goods sold Selling General and administrative Other Capital expenditures

Capital Call

Demand a portion of money from the investors

Key Employees

Employees whose experience and skills are critical to the success of a business

Penetration Rate

How much market share are you going to get

IPO

Initial public offering, a corporation's first offer to sell shares to the public $15M+

% of the company formula

Investment/investment + pre money Investment/post money

Revenue Forecasting Common Mistakes

Linear forecast - should have a growth rate Hockey stick forecast - start off flat then excel fast The 20/80 revenue vs. expense - should spend 80% on revenue

Beta

Lower risk, higher valuation Plastic water bottle

Accredited Investors

Made $200,000 in the last two years Made $300,000 between you and your spouse in the last three years knowing you will make it again $1 Million in net assets excluding your house

Five Year Forecasts

Monthly detail for first year Quarterly detail for second and third year Annual detail for fourth and fifth year

Start up Round

Need to hire more people - know more of what your business is $500,000-$3M

Newco

New company

Basis points

One hundredth of one percent

Active investors

Ongoing buying and selling activity by the investor

Passive investors

Only put money in

Pension Fund

Pooled money that is invested into different asset classes

Post Money Valuation

Pre money + investment Investment/% of the company

Pre Money Valuation

Price per share x number of shares Post money - investment

Limited Partners

Receives limited profits from the business and whose liability toward its debts is legally limited to the extent of his or her investment

Understanding Revenue Stream Nuances

Recurring Cyclical or seasonal - toy season

Dilution

Reduction of ownership due to the issuance or creation of new shares

Alpha

Risky, low valuation with a value adding idea Coconut as a water bottle

Series B Round

Should have about forty employees $3M-$10M

Financing Round

Start-ups raise money in rounds. Friends and family - common shares, Seed Round, Common Shares, Angels Capital A - Round. Followed by B, C, and D rounds.

Founders Stock

Stock owned by the firm's founders that enables them to maintain control over the company without having to own a majority of stock (common stock)

Committed capital

The amount that the limited partners have agreed to provide to the private equity fund

Seed Round

The first investments made into a company by someone other than the founder or the founder's family and friends $25,000-$500,000

Series A Round

The initial financing received from venture capitalists $1.5M-$5M

Sales Funnel

The journey potential customers go through on the way to purchase

Burn Rate

The measure of how much time a company has to reach positive cash flow before they run out of money or require additional funding $1M in the bank with a burn rate of $100,000 per month $1M/$100,000 = 10 months of operation

Lead Investor

The person or venture capital fund that organizes a round of financing, leads the round (e.g., in such matters as due diligence, valuation, LOI preparation, negotiations, documentation, and closing), and usually contributes the largest amount of capital to the round

Deal Flow

The rate at which business proposals and investment pitches are being received

Due Diligence

The steps investors should take to assess an investment opportunity

Exit Strategy of VC Funds

VC funds typically plan to exit in 4 to 7 years by selling the equity stake to the public Go public, sell the company, or go under

Vintage year

When the fund was started

Venture Capital

money provided by professionals who invest alongside management in young, rapidly growing companies jay have the potential to develop onto significant economic contributors

Down Round

when the valuation of a company at the time of an investment round is lower than its valuation at the end of the previous round