2. VENTURE CAPITAL
Definition
Start-up or growth equity capital provided by private investors
or specialized financial institutions
Given to the new companies that have high potential to grow
and need certain amount of investment at early stage
funds invested in these early-stage companies have exchange
for equity, or an ownership as a stake in the companies they
invest in
Venture Capitalist?
Investor who either provides capital to start-up ventures or
supports small companies that wish to expand but do not have
access to equities markets.
Will financing risky start-ups in the hopes that some of the
firms they support will become successful
3. How Venture Capital Works
Venture capitalists - will have the power to influence the major
decisions of the companies they are investing in because their
money is at stake
venture capital investment occurs after an initial seed funding
round
─ Aim: to refund growth of the money invested
Private and public sector will have the chance to create
institution via venture capital
It will systemically create a business networks for the new
firms and industries so they can grow and develop
4. Venture Capital
funds in early start-up stages
no obligation to repay but the entrepreneur must give up some part
ownership to the venture capitalist as the stake (becomes a partial owner of
the start-up)
no assets to back the investment
the potential pay-outs must be drastically higher to have a successful
investment
5. BANKS AND GOVERNMENT PROGRAMS
Bank Loans
o Commonly medium of the source of funding a small and a medium sized-
business which to give loans
o Borrowers should have a good record and also have excellent credit in
order to make a bank loans
o Must able to fulfil the requirements of the banks
o Two types of banks loan:
Short-term Loans Long-term Loans
Maturities of the loans are
around one to five years
Maturities greater than five
years and it is usually offer
service to the new venture
Secured by the receivables,
inventory or other assets
Used to finance the purchase
of property or equipment.
6. Loans
Loan have a contractual obligation to pay back that amount with the
fee interest over some period of time
Sometimes the loan is backed by assets like equipment or inventory
or receivables
Small business - loan is backed by a personal guarantee from the
business owner
7. Government Programs
Government agencies will provide the financing funds such as grants
subsidies
Require specific criteria standards before the reviewers give the
approval
Criteria:
Significance
Approach
Innovation
Assessment of expertise
Need for the grant
Generally, entrepreneurs have to provide:
A detailed project description
An explanation of the benefits of the project
A detailed work plan with full costs
Details of relevant experience and background on key managers
Completed application forms
8. PRIVATE PLACEMENTS
What is a Private Placement?
• Method of raising capital through securities and often used by a
small venture
• Involves private investors purchasing share or bonds
• sell the securities to a relatively small number of the investor
• Minimal regulatory requirement and standards must be abide by
when private placement want to be executed via SEC
• Does not require a prospectus, and quite often, detailed financial
information is not disclosed
• Allow entrepreneurs to sell securities to a targeted group of
accredited investors that meet specified requirements
• Private placements are sold using a private placement memorandum
(PPM) and cannot be broadly marketed to the general public
9. IPO (Initial Public Offering)
What is IPO?
Public offering
The first time that the stock of a private company is offered to the
public
Provided by smaller, younger companies seeking capital to expand
Also done by large privately owned companies looking to become publicly
traded
Raising capital through the sale of securities on the public markets
Disclosure information relevant to specific transaction is required by
law. The information that is given is called prospectus
10. Advantages and
Disadvantages of IPOs
Advantages
– Diversity of group of investors to raise capital
– Gives the company a lower cost of capital
– the company’s exposure, prestige, and public image will be known and can help
the company’s sales and profit
– Public companies can attract and retain better management and skilled
employees
– Facilitating acquisitions
Disadvantages
– The company have to make disclose financial, accounting, tax, and other
business information.
– Public dissemination of information which may be useful to competitors
– Increased time, effort and attention required of management to make the
report
– Risk that required funding will not be raised if the market does not accept
the IPO price, forcing to lower the stock price right after the offering
– Loss of control and have stronger agency problems due to new shareholders
