wed. Venture Finance Exam 1 Ch 1 & 3

Entreprenuership

process of changing ideas into commercial opportunities, and creating value.

Entrepreneur

individual who thinks, reasons, and acts to convert ideas into commercial opportunities and to create value.

Successful entreprenuer

someone who sees and seizes commercial opportunities, tends to be optimistic, and plans to obtain the physical, financial, and human resources needed for success.

Unsuccessful entrepreneur

someone who has difficulty recognizing opportunities, views situations negatively, and may be paralyzed by fear of failure.

Societal Changes

changes in society that create new needs, wants, markets, or business opportunities.

Technological Changes

advances in technology that create new products, services, markets, or ways of doing business.

Emerging Economies

developing economies that create new markets and entrepreneurial opportunities.

E-Finance Principle #1

A venture needs others’ resources and must provide them an adequate return to survive.

Remember: Get resources → provide return → survive

E-Finance Principle #2

Investors expect higher returns for taking higher risk.

Remember: More risk → more expected reward.

E-Finance Principle #3

Cash burn is the gap between cash spent and cash collected.

Remember: Cash out − cash in.

Cash burn

cash is being spent faster than it is being collected.

Cash build

cash receipts exceed cash distributions.

Cash burn rate

indicates how quickly a company is using its available cash reserves.

E-Finance Principle #4

Public markets use standardized financing terms; private markets allow customized terms.

Remember: Public = standardized; Private = customized.

Public markets

more standardized/regulatory structure

Private markets

more flexibility to negotiate financing terms.

E-Finance Principle #5

The goal is to increase the value of the firm.

Remember: Increase firm value.

E-Finance Principle #6

Investors, founders, employees, and stakeholders should have incentives that support the firm’s goals.

Remember: Everyone benefits from the same goal.

Owner-manager conflict

differences between a manager’s self-interest and the interests of the owners who hired them.

E-Finance Principle #7

Information asymmetry occurs when insiders have more information than outsiders.

Remember: Insiders know more.

Insiders

founders/managers who know more about the venture.

Outsiders

investors or other parties who have less information.

Private ventures

information asymmetry tends to be greater.

Public ventures

disclosure requirements provide investors with substantially more information.

Pecking order

the preferred order in which a company seeks financing:

1. Internal funds

2. Bank debt

3. Convertible debt

4. Equity

Staged Financing

providing financing to a venture in multiple rounds/stages rather than giving the company all the money at once.

Seed Capital

early financing used to help a venture develop and establish the business.

Mezzanine Financing

generally associated with a later stage of venture development.

Unit Offering

an offering consisting of common stock and warrants.

Venture Capital (VC)

financing provided by investors to ventures with growth potential.

VC exit options

• IPO → company goes public

• Acquisition → another company buys it

• Liquidation → company sells assets and shuts down

Initial Public Offering (IPO)

the first public sale of a company’s shares.

Seasoned Equity Offering (SEO)

a subsequent equity offering by a company that is already public.

Underpricing

when shares are offered to the public at a price below what the market ultimately values them at.

Underwriter

an investment bank/financial intermediary that helps determine the offering price and facilitates the sales of securities to investors.

Primary Sale

a sale of newly issued securities where the proceeds go to the company

Secondary Sale

a sale of existing shares when the proceeds go to the existing shareholder/seller, rather than the company.

Venture Life Cycle

Development Stag, Startup Stage, Survival Stage, Rapid Growth Stage, Early-Maturity Stage

Development Stage

the venture is primarily an idea.

Startup Stage

the venture is organized and begins gathering resources and startup financing.

Survival Stage

the venture has revenue, but revenue is not yet enough to cover expenses.

Rapid Growth Stage

revenue and operations grow rapidly.

Early-Maturity Stage

revenue growth and cash flow continue to grow, but at a slower rate than during rapid growth.

SPAC

a publicly traded shell company formed to raise money and later acquire or merge with a private company.

Direct Listing

a company becomes publicly traded by listing existing shares on a public exchange without the traditional (IPO) process of selling newly issued shares to raise primary capital.

Repeated Equity & Debt Offerings

after becoming public, companies can repeatedly raise capital through additional stock or debt offerings.

Intellectual Property (IP)

legal rights protecting creations, inventions, brands, and other forms of intellectual property.

Patent

protects an invention or new technological process/product.

Trade Secret

confidential business information that provides economic value because it is not publicly known.

Trademark

protects a name, symbol, logo, or other identifier associated with a business/product.

Copyright

protects original creative works.

Confidential Treatment Order

a legal mechanism allowing certain sensitive information to receive confidential treatment rather than being publicly disclosed.

Solo Proprietorship

a business venture owned by one individual who is personally liable for the venture’s liabilities.

Unlimited Liability

the owner’s personal obligation to pay business liabilities that are not covered by the business’s assets.

Partnership

a business venture owned by two or more individuals.

General Partnership

partners are jointly and personally liable for the partnership’s liabilities.

Joint Liability

legal action treats all partners equally as a group.

Several Liability

allows individuals/subsets of partners to be the object of legal action related to the partnership.

Joint & Several Liability

Partners can be held responsible collectively and/or individually for partnership obligations.

Limited Partnership

a partnership containing at least one general partner or 1+ limited partners.

Corporation

a legal entity that separates the personal assets of owners/shareholders from the assets of the business.

Limited Liability

creditors can seize the corporation’s assets but generally have no recourse against shareholders’ personal assets.

Corporate Charter

the legal document that establishes the corporation.

C Corporation

a corporation with:

• limited liability for shareholders

• one or more owners

• no maximum number of shareholders

• unlimited life

• generally easy transferability of ownership

S Corporation

a corporation that:

• provides limited liability to shareholders

• generally, has corporate income taxed through to shareholders

• has restrictions on ownership

Limited Liability Company (LLC)

a business organization owned by members that provide limited liability to its owners.

Major LLC Incentive

earnings can be generally taxed at the personal income tax rates of the members rather than being taxed as a separate C corporation.

Global economy

awareness of international innovation and sourcing.

Entrepreneurial Finance

application and adaption of financial tools and techniques to the planning, funding, operation, and valuation of an entrepreneurial venture.

Rapid-Growth Stage

period of very rapid revenue and cash flow growth.

Early-Maturity Stage

period when the growth of revenue and cash flow continues but at a much slower rate than in the rapid-growth stage.

Seed Financing

funds needed to determine whether the idea can be converted into a viable business oppportunity

Startup Financing

funds needed to take the venture from having established a viable business opportunity to initial production and sales.

Venture Capitalists

individuals who join in formal, organized firms to raise and distribute venture capital to new and fast-growing ventures.

Business Angels

wealthy individuals operating as informal or private investors who provide venture financing for small businesses.

Investment Banker

individual working for an investment bank who advises and assists corporations in their security financing decisions and regarding mergers and acquisitions.

First Round Financing

equity funds provided during the survival stage to cover the cash shortfall when expenses and investments exceed revenues.

Second Round Financing

financing for ventures in their rapid-growth stage to support investments in working capital.

Bridge Financing

temporary financing needed to keep the venture afloat until the next offering.

Utility Patents

cover mechanical or general inventions, chemical inventions, and electrical inventions.

Plant Patents

protect discoveries of asexual reproduction methods of new plant varieties.

Business Method Patents

protect specific ways of doing business and the underlying computer codes and technology.