CHAPTER 1

Venture Capital - is a mechanism wherein investors support entrepreneurial talent by providing finance and business skills to obtain long–term capital gains by exploiting market opportunities. 

-          Is all about fundings start-up businesses

-          Long-term financing

-          Funding up the Capital

-          Start-up

Investors in Venture Capital – Venture Capitalist

Advantages and Disadvantages of Venture Capital

Advantages

-          If there is funding, there is an opportunity for growth, which leads to expansion.

-          Opportunity for Expansion of Company

-          Valuable Guidance and Expertise

-          Helpful in building networks and connections

-          No obligation for repayment

-          Venture Capitalists are trustworthy

-          Easy to locate

Disadvantages

-          Dilution of Ownership and Control

-          Early Redemption by VC’s

-          VC’s take a long time to decide

-          Approaching a VC can be tedious

-          May require high Return on Original Investment

-          May release the funds from time to time

-          May lead to under-valuation

Venture Capital VS. Private Equity

Venture Capital

-          Invest in new businesses

-          Own 50% or less of business

-          $10 million or less invested

Private Equity

-          You are adding up the capital

-          Existing businesses

-          Invest in established businesses

-          Own 100% of business

-          $100 million or more invested

Similarities

-          They are both kind of investment

-          Exit by selling investment

The Funding Process: Approaching Venture Capital for funding as a Company

Venture Capital Process:

-          Fundraising – Source Capital from Banks, Corporations, Funds

-          Evaluation – Evaluate Venture Opportunities

-          Investment - You have to choose your investment / Invest Capital into Enterprises

-          Governing - You have to gather all your sources and all activities that will give your profit / Govern Business to Profitable Growth

-          Exit - Main goal is to sell through IPO / Generate Liquidation through IPO

-          Distribution - Distribute Returns to Investors

Note: The long term of your investment, the higher the profit, but also the higher risk.

The Venture Capital funding process typically involves 4 phases in the company’s development

1.)    Idea Generation (Planning)

-          To have your business plan ready / There should be an executive summary of the business proposal

-          In gaining a venture capital funding, you have to present your business plan / Description of the opportunity and the market potential and size

-          All your visions and missions, marketing strategies, financial plan will all be included / Review the existing and expected competitive scenario

-          It is a key component in getting a funding / Detailed financial projections

-          Details of the management of the company

There is a detailed analysis done of the submitted plan, by the Venture Capital to decide whether to take up the project or no.

2.)    Start-up (Organizing & Staffing)

-          Process wherein you would clear all queries and try to solve arising questions and problems by the investors.

3.)    Ramp-up (Leading)

-           This is the phase wherein you are trying to finish the agreement of your funding.

-          The term sheet is generally negotiable and must be agreed upon by all parties, after which on completion of legal documents and legal due diligence, funds are made available.

-          Malapit ng ma-close yung deal

4.)    Exit (Controlling)

-          If the capitalist do not agree, they would exit the market.

-          You can see the importance of planning.

3 Types of Venture Capital Funding

1.)    Early Stage Financing

-          Seed Financing = you are simply financing a start-up loan / haven’t started any start-up activities

-          Start-up Financing = as compared to seed financing, they have already started start-up activities and they are about to be finished, however they needed an additional financing. / given to companies for the purpose of finishing the development of products and services.

-          First Stage Financing = the start-up capital is already furnished or ubos na and that’s the reason they are getting additional start-up financing. / Companies that have spent all their starting capital and need finance for beginning business activities at the full scale are the major beneficiaries of the First Stage Financing.

2.)    Expansion Financing

-          The only goal here is expansion

-          You are getting a financing for the sole purpose of your start-up

-          Offers short-term interest

-          Silent in the period of interest (short or long-term)

-          may be categorized into second-stage financing, bridge financing, and third-stage financing or mezzanine financing. Second-stage financing is provided to companies for the purpose of beginning their expansion. It is also known as ‘mezzanine financing.’ It is provided for the purpose of assisting a particular company to expand in a major way. Bridge financing may be provided as a short-term interest-only finance option as well as a form of monetary assistance to companies that employ the Initial Public Offers as a major business strategy.

3.)    Acquisition or Buy-out Financing

-          Acquisition = you are trying to get the portion of the company and not the whole

-          Buy-out = you are saving the company for the verge of exiting the market or simply buying the whole company

-          Acquisition or buyout financing = is categorized into acquisition finance and management or leveraged buyout financing.

-          Acquisition financing = assists a company to acquire certain parts or an entire company.

Management or leveraged buyout financing = helps a particular management group to obtain a particular product of another company.