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