Module VII

Criteria for evaluating appropriateness of financing alternatives:

Amount and timing of funds required. Projected company sales and growth. Early stage financing. Development financing. Acquisition financing.

Three types of funding:

Financing the Business

(cont.)

Risk capital markets provide debt and equity to non secure financing situations. Types of risk capital markets:

Informal risk capital market. Venture-capital market. Public-equity market.

All three can be a source of funds for stageone financing.

However, public-equity market is available only for high-potential ventures.

It consists of a virtually invisible group of wealthy investors (business angels). Investments range between $10,000 to $500,000. Provides funding, especially in start-up (firststage) financing. Contains the largest pool of risk capital in the United States.

Table 12.2 - Characteristics of Informal Investors (cont.)

Nature of Venture Capital

A long-term investment discipline, usually occurring over a five-year period. The equity pool is formed from the resources of wealthy limited partners. Found in:

Creation of early-stage companies. Expansion and revitalization of businesses. Financing of leveraged buyouts of existing divisions of

major corporations or privately owned businesses.

Venture capitalist takes an equity participation in each of the investments.

Venture Capital

(cont.)

Venture-Capital Process

Objective of a venture-capital firm - Generation of long-term capital appreciation through debt and equity investments. Criteria for committing to venture:
Strong management team. A unique product and/or market opportunity. Business opportunity must show significant capital

appreciation.

Venture Capital

(cont.)

Venture-capital process can be broken down into four primary stages:

Stage I: Preliminary screening Initial evaluation of the deal. Stage II: Agreement on principal terms - Between entrepreneur and venture capitalist. Stage II: Due diligence - Stage of deal evaluation. Stage IV: Final approval - Document showing the final terms of the deal.

Venture Capital

(cont.)

Locating Venture Capitalists

Venture capitalists tend to specialize either geographically by industry or by size and type of investment. Entrepreneur should approach only those that may have an interest in the investment opportunity. Most venture capital firms belong to the National Venture Capital Association.

Table 12.6 - Guidelines for Dealing with Venture Capitalists (cont.)