finance
What is the main takeaway from the CB Insights study?
That many of the most successful startup exits were made by firms that didn't take huge amounts of VC money. Taking a lot to start with puts pressure on startups to grow fast and make profit for VC investors.
Considerations of who to approach
1. Find investors whose strategy and expertise fit your proposal 2. For early stage venture, seek local investors first 3. Look for a referral 4. Check references on investor
Which type(s) of funding are the following startups likely to use: 1. a new ecommerce website to sell only backpacks. 2. a new biotech process for developing anticancer drugs. 3. a new e-auction website (e.g. eBay or Quibids) that connects buyers and sellers.
1. Self financing 2. Angels if early stage or VC if later stage 3. Probably VC to make big move rapidly
puts
A bond that allows the holder to force the issuer to repurchase the security at specified dates before maturity. The repurchase price is set at the time of issue, and is usually par value.
call
A bond that can be redeemed by the issuer prior to its maturity. Usually a premium is paid to the bond owner when the bond is called. Also known as a "redeemable bond."
What to do in first meeting?
1. Create excitement 2. Establish credibility 3. Begin to build relationship
three functions on an investment bank
advise companies on the mix and timing of security issues. underwriting/giving banks money. distributing/ selling stock through banks and brokerages then selling to consumer market
the legal definition of a corporation
an artificial being, invisible, intangible, and existing only in the contemplation of law"
two ways investors go about selecting a mixture or portfolio of investments to reduce risk
diversification and asset allocation
investment bank
financial institution engaged in issuing and reselling new securities.
three types of bonds
government bond, municipal bond, corporate bond
bond rating systems
rates and grades showing that amount of risk that a company won't be able to pay you back
security and exchange commission (SEC)
regulates. federal agency that administers U.S. securities laws to protect the investing public and maintain smoothly functioning markets
chief financial officer (CFO)
responsible for managing the firm's financial affairs and overseeing the firm's finance related activites
general partner
runs the business and faces unlimited liability for the firm's debts. the life of the partnership is tied to the general partner. it'd difficult to transfer ownership of the general partner's interest in the business-this usually requires a formation of a new partnership.
what is a bond?
security through which and issuer promises to pay the buyer a certain amount of money by a specified date "IOU"
market value growth charts
show amount of risk within a company
three types of business organizations
sole proprietorship, partnership, and corporation
diversification
spread risk out within same asset class. some will be positive and some negative but will balance out in the end
ethical and agency considerations in corporate finance
the agency problem (conflicts that arise out of the separation of management and ownership of the company) interferes with implementing the goal of maximizing shareholder wealth. when manager have little or no ownership in a firm, they are less likely to work energetically for the company's shareholders.
par value
the face value of a share of stock at the time it is originally issued
what is finance?
the study of how people and businesses evaluate investments and raise capital to fund them
book value
the value of a common stock expressed as total shareholders' equity divided by the number of shares of stock
partnership
two or more persons who come together as co owners for the purpose of operating a business for profit. no operation between the general partnership and its owners with respect to debts or being sued. profits of the partnership are faced to the partners as personal income. provides access to equity
corporation
typical organizational form chosen if very large sums of money are needed to build a business. legally functions separately and apart from its owners (the shareholders, also referred to as the stockholders). can individually sue and be sued, purchase, sell, or own property, and its personnel are subject to criminal punishment for crimes committed in the name of the corporation.
risk
variation of stock price. smaller company ='s lots of fluctuations. more risk more reward
asset allocation
what percentage should be put into different asset classes
area of finance that deals with determining the best way to manage its cash flows as they arise in its day to day operations is referred to as:
working capital management
How does angel investing differ from venture capital funding?
Angel- smaller amounts of money, individual investor most likely to have emotional connection, early stage interest without desire to be intrusive 2A Forbes Article on how to raise $ from VC
What are the motivations of the entrepreneurs that influence whether they use "bootstrapping" or seek venture capital?
Bootstrapping or self financing allows entrepreneurs to maintain control of operations and ownership equity VC route allows for bigger/faster strategic growth, when dominating market or moving fast is critical
What type of financing do you think most startups use and why?
Personal savings, credit, money from family/friends because it is the easiest/most available source
For startups using venture capital funding, what does an "exit" mean?
When they go public, IPO
sole proprietorship
a business owned by a single individual who is entitled to all the firm's profits and who is responsible for all the firm's debt
maximizing shareholder wealth
a principal goal, achieved by maximizing the stock price
limited liability company (LLC)
attractive alternative to the corporation for such a small business, a cross between a partnership and a corporation. no double taxation of earnings. the most a partner can lose is only what they invested. if an LLC looks too much like a corporation it will be taxed as one
area of finance that deal with determining what long-term investments the firm should take is referred to as:
capital budgeting
How a firm should raise money to fund investments is referred to as:
capital structure
market value
current price of a share in the stock market
financial markets
institutions that facilitate financial transactions
corporate bond
issued by a company as a source of long-term funding. more of these than all others. "risk free rate"
municipal bond
issued by a state or local government, lower yield/tax free income
government bond
issued by the federal government, can lower ratings
blue-chip stock
issued by well established company with a sound financial history and a stable pattern of dividends. ex: johnson and john sons, coca cola
the two classes of partnerships
limited and general
financial management team
makes investment (capital budgeting) decisions, capital structure decisions, and manages company's day to day operations (capital management)
equilibrium between supply and demand
market value/ reflects current situation of the company and future expectations/ growth rate
limited partner
only liable up to the amount the limited partner invested. Share can be transferred to another owner without the need to dissolve the partnership.
three ways stock values are expressed
par value, market value, book value