Finance and the Small Business - Venture Capital and the Small Business
19 important questions on Finance and the Small Business - Venture Capital and the Small Business
Variety of funding sources to finance a new org. through stages of growth and development
- personal savings entrepreneur
- family & friends
- business angels
- venture capital
- government
Sources to finance a new org.
Venture Capital
- Financial intermediars that attract money from financial institutions (banks, pension funds)
- LE, wealthy families with specific investment focus
- Larger amounts then angels, and at later stage
With changes in capital requirements and sources of finance, there are 4 different stages a firm can grow through
- Seed stage: isn't founded yet, do not need a lot of money, depends on own money & friends
- Start-up stage: financial needs rises, risk invesment is high. Depends on 'love money', business angels and government
- Initial growth stage: business is growing, risk and uncertainty. No longer love money, solely business angels or venture capital
- Sustained growth stage: grow a lot, bigger invesment, so venture capital
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Investment process of business angels
Harvesting
- invest is big risk, some win some lose
- most are motivated by fun of investing
investment process of venture capital
Post-investment involvement
- VC use expertise & networks to make a variety of contributions to their investee companies
- help with suppliers, customers, establish tactics & strategy etc
Sources to finance a new org.
Government-backed investment organizations
- government created investment vhicles to fill gaps in supply of venture capital
- create investment funds under private management
sources to finance a new org.
Personal savings entrepreneur
- he shows he's financialy commited to org.
- other finance is hard to find in seed & start-up stage
Sources to finance a new org.
Business Angels
- High net-worth individuals, who invest own money directly in org.
- No family connection, but hope to gain financial
- play a hand on role in invested org.
investment process of venture capital
Deal structures
- Give investor control over key decissions
- Give investor involvement in org.
- Specify compensation for management
- Investor will use investment instruments, that give protection
Investment process of business angels
Post-investment involvement
- involvement differs per angel, some just a week, others years
- angel can have different roles, but mostly its advisory
Investment process of business angels
Deal evaluation (2 stages)
- Initial screening: angel decides if investment fits own personal criteria, wheter its worth time & money for second stage
- Detailed investigation: investor takes closer look at business (business plan, financial info etc), and decides if he wants to negotiate a deal
Sources to finance a new org.
Family & Friends
- biggest source for start up other then themselves
- mostly short-term, sometimes equity share
Profile Business angel
- Mostly male
- Having wealth
- experienced entrepreneur
Investment process of business angels
Deal originating
- First contact entrep. & angel.
- Contact can begin formal (via lawyer etc) or informal (one just approaches the other)
Investment process of business angels
Negotiating & contracting
- when decided to invest, angel must negotiate and contract
- three main issues: valuation and structuring of deal (share prize, time for exit etc), and conditions of investment
Investment process of business angels
- Deal origination
- deal evaluation
- negotiating & contracting
- post-investment involvement
- harvesting
Investment process of venture capital
- source of investment opportunities
- deal evaluation
- deal structures
- post-investment involvement
- harvesting
investment process of venture capital
Harvesting
- public offering in which share of VC are sold
- trade sale in which business is sold to other company
- private placement, purchasing VC share by another investor
investment process of venture capital
Deal evaluation
- likely as BA, but more thorough
- VS invest at later stage, less risks
- investment proposal concludes: concept, management and returning
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