Hisrich Peters Shepherd Chapter 12 Informal Risk Capital, Venture Capital, and Going Public...
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Transcript of Hisrich Peters Shepherd Chapter 12 Informal Risk Capital, Venture Capital, and Going Public...
Hisrich
Peters
Shepherd
Chapter 12Informal Risk Capital,
Venture Capital, and
Going PublicCopyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
12-3
Risk capital markets provide debt and equity to nonsecure financing situations.
Types of risk capital markets: Informal risk capital market. Venture-capital market. Public-equity market.
Financing the Business (cont.)
12-4
Informal Risk Capital
It consists of a virtually invisible group of wealthy investors called business angels.
Investments amounts at all dollar levels. Provides funding, usually in early-stage
ventures (seed or first round) Contains the largest pool of risk capital in
the United States. (more than venture capital!)
12-7
Venture Capital
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.
12-10
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 potential.
Venture Capital (cont.)
12-12
Venture-capital process typically occurs in four primary stages: Preliminary Screening – Initial evaluation of the
deal. Agreement on Principal Terms - Between
entrepreneur and venture capitalist. Due Diligence - Stage of deal evaluation. Final Approval - Document showing the final
terms of the deal (Terms Sheet).
Venture Capital (cont.)
12-13
Locating Venture Capitalists Venture capitalists tend to specialize either
geographically by industry, and/or by size and type of investment.
Entrepreneur should approach only those VCs that may have an interest in the investment opportunity.
Most venture capital firms belong to the National Venture Capital Association (NVCA).
Venture Capital (cont.)
12-16
Valuing Your Company
Factors in Valuation Nature and history of business. Economic outlook- general and industry. Comparative data. Market value of assets (less liabilities). Future earning capacity. Dividend-paying capacity. Assessment of goodwill/intangibles. Previous sale of stock. Market value of similar companies’ stock.
(comparables and earnings/CF multiples)
12-17
Ratio Analysis Serves as a measure of financial strengths and
weaknesses of the venture but should be used with caution.
It is typically used on actual financial results. Provides a sense of where problems exist in the
pro forma statements.
Valuing Your Company (cont.)
12-22
General Valuation Approaches Assessment of comparable publicly held
companies’ stock prices Present value of future cash flow Earnings Multiples Factor approach (weighted capitalized value)
Earnings Dividends Net Asset Valuations
Liquidation value Replacement value
Valuing Your Company – Mechanics (cont.)
12-25
Valuation / Equity Share Example
Start-up will earn $1,000,000 after taxes in year 5.
VC invests $800,000 in start-up Comparable companies selling for an
average of 15x earnings 50% compound annual required return for
VC firm
Question: What % equity share should the VC get in the start-up?
12-26
Going Public
Selling part or all of the company by registering with the Securities and Exchange Commission (SEC).
Very difficult to do!
12-28
Timing the IPO
Timing Is the company large enough? What are the company’s earnings, and how
strong is its track record of financial performance?
Are the market conditions favorable for an IPO? How urgently is the money needed? What are the needs and desires of the present
owners?
12-29
Underwriter Selection Managing Underwriter - Lead financial firm in
selling stock to the public. Underwriting Syndicate - A group of firms
involved in selling stock to the public. Factors to consider in selection:
Reputation Distribution capability Experience Cost Buy/Sell vs. Best Efforts
Underwriter Selection
12-30
Registration Statement and Timetable “All hands” meeting - Preparing a timetable
for the registration process. The SEC takes six to 12 weeks to declare
the registration effective.
12-31
6 to 12 weeks for SEC to declare the registration effective – if no issues.
Reasons for delays: Heavy periods of market activity. Peak seasons. Attorney’s unfamiliarity with federal or state
regulations. Inadequately fulfilled SEC requirements. When the managing underwriter is
inexperienced.
Registration Statement and Timetable (cont.)
12-32
SEC attempts to ensure full and fair disclosure of investment-relevant information.
Registration statement consists of: Prospectus. Registration statement.
Most initial public offerings use a Form S-1 registration statement.
Registration Statement and Timetable (cont.)
12-33
Cover page Prospectus summary Description of the
company Risk factors Use of proceeds Dividend policy Capitalization Dilution
Selected financial data Business, management
and owners Type of stock Underwriter information Actual financial
statements
Registration Statement and Timetable (cont.)
Prospectus
12-34
The Registration Statement Information regarding:
Offering Past unregistered securities offerings of the company Other undertakings by the company
Includes exhibits: Articles of incorporation. Underwriting agreement. Company bylaws. Stock option and pension plans Initial contracts
Registration Statement and Timetable (cont.)
12-35
Procedure Preliminary prospectus (Red Herring) can be distributed to
the underwriting group. Deficiencies are communicated through an SEC Comment
Letter. Pricing Amendment - Additional information on price,
commissions and net proceeds is submitted to the SEC to develop the final prospectus.
Waiting period - Time between the initial filing and its effective date is usually around 2 to 10 months
no publicity of offer during this period.
Registration Statement and Timetable (cont.)
12-36
IPO Legal Issues and Blue-Sky Qualifications Legal Issues
Quiet period – 90-day period in going public when no new company information can be released.
Blue-Sky Qualifications Blue-sky laws - Laws of each state regulating
public sale of stock. May cause additional delays and costs to the
company. Many states allow their state securities
administrators to prevent an offering from being sold in their state.
12-37
After Going Public
Aftermarket Support Actions of underwriters to help support the price
of stock following the public offering. Relationship with the Financial Community
Has a significant effect on the market’s interest in and the price of the company’s stock.