3.2 VC specific characteristics and risks Flashcards
How does financial intermediation work?
(smart money, RoI, etc…)
check slide 20
Main differences between Buyout and VC #1
Sector: Established industry sectors vs …
Stage: Stable growth and mature stages vs …
Approach: Financial Engineering, Corporate restructuring vs …
Uncertainties: Measurable risk for buyout but …
Source of return: Leverage/Company building/multiple arbitrage vs …
Selection: Intesive financial due diligence vs
Focus on cutting-edge technology or rapidly growing sectors
Seed, start-up, and expansion stages
Industry know-how, product development and commercialization
Risk is difficult to measure for VC
Company (and market) building, finding follow-on investors
Limited financial due diligence but extensive sector/product due diligence
main diff Buyout and VC #2
Valuation constraints: Cash-flow projections overlooked by credit lenders in buyout but for VC …
Business model: High percentage of success with limited number of write-offs vs …
Financing: Club deals and large investment vs …
Monitoring: Cash flow management vs …
Success factor: Backing experienced managers vs
None, often no non-VC third party oversight
A few winners with many write-offs
Limited syndication, staged financing
Growth management
Backing entrepreneurs
What are the primary factors influencing the availability of capital?
- Uncertainty w.r.t (…)
- Nature of Assets (…)
- Asymmetric information (…)
- Market conditions (…)
research, market, product, customer benefit
intangibility e.g. patents, goodwill, brand
entrepreneurs regularly know their business better than investors
capital supply from public or private investors, price of capital, conditions at product market
Options for startup financing differ from established companies: startup balance sheet at a glance– WHY?
Check slide 24.
Internal financing is non-existent for startups, external financing is mainly possible directly through the capital provider
Development of a venture’s capital structure
Slide 25 – What is really meant here?
Main differences between early stage and growth stage?
Metrics: financing phase; company phase; revenue expectation, business model, product, challenges
Financing phase: series A/B vs series B,C,D
Company phase: seed/startup vs expansion
Revenue expectation: no or low revenue vs nearing profitability/profitable
Business model: high uncertainty with only a few winners vs Reduced uncertainty with increased winners
Product: concept/idea/MVP/Marketing concept vs Market entry/expansion/Production
Challenges: assessing viability of product/professionalism of entrepreneurs/ search for leadership team vs composition of market position and image/need for additional investments
Distinguish between seed, early-stage, late stage and expansion stage
slide 27
(see J-curve)
Who is in venture equity funding?
Informal investors:
formal investors: incubators, PE firms, VCs
family, friends and fools, crowd-funding, business angels, incubators
New World Order of PE?
- … moved into
Europe - Crossover funds increasingly entered … with new business strategies, providing “less complex” and cheaper capital
- Traditional PE funds started to enter growth stage and …
- … (e.g., AngelList, Bunch) have lowered barriers to entry for new market participants
check slide 30 for diagram. important.
Multi-stage US VCs
private markets
made the tech industry a core focus area
Innovation in private infrastructure
How can VC firms add value to their portfolio companies?
Network: Introductions to …(e.g., advertising channels) and advisors (e.g., top tier investment banks/lawyers), key employees
Experience and Abilities: … (e.g., 100-day plan, identification of initiatives, development of roadmap and tracking) & … (e.g., product development, target customer and/or distribution channels)
Reputation: Support in … (either as the lead investor or in trying to bring in new investors)
potential customers, business partners
Strategic planning; Strategic support
follow-on financing
Specific characteristics to consider in VC investments
Management team: Leadership, …, …, Management capabilities
Market: significant …, large…, significant
Product: 3 factors?
Financials: time to … ,…
Industry expertise; Track record
Market size, market growth, barriers to entry
uniqueness, proprietary, possibility to protect
break even, opportunity to cash out with high rates of return
Staged capital commitments
▪ Round financing: staging of capital where a … is provided for a specific stage or round of financing
▪ Invested money is committed for a 3-to-18- month phase and is followed by…
▪ Each round dilutes previous shareholders, i.e., …
▪ Milestone agreements: contracts may specify measures to be taken…
discrete and smaller pool of capital
subsequent commitments based on results and promise
need to participate in follow-on rounds to maintain ownership stake
contingent on certain predefined events (milestones)
Risks| Why should anyone care about a firm’s venture stage focus?
▪ Investments at different …
▪ The earlier the venture/financing stage, the lower the …, so the greater is the …, but the greater as well is the risk of total loss.
▪ …by diversification
stages carry distinct levels of risks
share price; potential gains
Reduce risk
Risks| VCs receive significant investor rights to protect their investment: What are they?
(1) Information rights
(2)
(3) Mgt convenants
(4)
(5) Cash flow rights
(6)
(7) Disinvestment rights
control rights
milestone agreements
preemptive rights
