Chapter 23 CAÍA Flashcards
- Why do VC’s and buyout companies target different IRR’s?
A VC firm typically acquires a substantial but minority position in the company. Control is not absolute. Conversely, in a buyout, all of the equity is typically acquired, and control is absolute. In addition, venture capital and buyout firms target different internal rates of return (IRRs). Although both are quite high, not surprisingly, VC targets are higher. The reason is simple: There is more risk funding a nascent company with brand-new technology than an established company with regular and predictable cash flows.
Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (pp. 637-638). Wiley. Edición de Kindle.
- What is the overriding goal of both VC’s and Buyout firms?
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Despite their differences, both types of private equity seek to apply capital with activist equity ownership to improve the underlying company’s chances for success.
Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 638). Wiley. Edición de Kindle.
20 Bagger
The terminology 20-bagger indicates a company that appreciates in value 20-fold compared to the cost of the VC investment.
Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 639). Wiley. Edición de Kindle.
Exit Plan
The exit plan describes how venture capitalists can liquidate their investment in the start-up company to realize a gain for themselves and their investors.
Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 639). Wiley. Edición de Kindle.
Venture Capital Fund
A venture capital fund is a private equity fund that pools the capital of large sophisticated investors to fund new and start-up companies.
Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 639). Wiley. Edición de Kindle.
Clawback Provision
A clawback provision is a covenant that allows the limited partners to receive back (or claw back) previously paid incentive fees. The previously paid incentive fees are returned if, at the end or liquidation of the venture fund, the limited partners have a net loss.
Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 641). Wiley. Edición de Kindle.
Angel Investing
ANGEL INVESTING: Angel investing refers to the earliest stage of venture capital, in which investors fund the first cash needs of an entrepreneurial idea. Angel investors often come from F & F—that is, friends and family. But sometimes venture capitalists include a third F, for fools. At this earliest stage of the venture, typically a lone entrepreneur has just an idea, possibly sketched out at the kitchen table or in the garage. There is no formal business plan, no management team, no product, no market analysis, just an idea.
Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 644). Wiley. Edición de Kindle.
Seed Capital Stage
SEED CAPITAL: The seed capital stage is the first stage where VC firms invest their capital into a venture and is typically prior to having established the viability of the product. At this stage, a business plan is completed and presented to a VC firm. Some members of the management team have been assembled at this point, and the entrepreneur and a small team have performed a market analysis and addressed other parts of the business plan.
Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 644). Wiley. Edición de Kindle.
FIRST- OR EARLY-STAGE VENTURE CAPITAL
FIRST- OR EARLY-STAGE VENTURE CAPITAL: The start-up company should now have a viable product that has been beta tested. The next step is to begin testing of the second-generation prototype with potential end users. First- or early-stage venture capital denotes the funding after seed capital but before commercial viability has been established. Typically, a price or fee is charged for the product or service. Revenues are being generated, and the product or service is now demonstrating its commercial viability. Early-stage VC financing is usually $2 million or more.
Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 645). Wiley. Edición de Kindle.
SECOND- OR LATE-STAGE/EXPANSION VENTURE CAPITAL:
SECOND- OR LATE-STAGE/EXPANSION VENTURE CAPITAL: At this point, the start-up company may have generated its first profitable quarter or be just at the point of breaking even. Commercial viability is now established. Cash flow management is critical at this stage, as the company is not yet at the level where its operating cash flows alone can sustain its own growth. Second- or late-stage/expansion venture capital fills the cash flow deficiency once commercial viability is established. Sometimes late-stage/expansion capital is broken down into finer stages, called second- and third-stage venture capital.
Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 645). Wiley. Edición de Kindle.
Mezzanine Financing
MEZZANINE FINANCING: Mezzanine venture capital, or pre-IPO financing, is the last funding stage before a start-up company goes public or is sold to a strategic buyer. At this point, a second-generation product may already be in production, if not distribution. The management team is together and solid, and the company is working on improving its cash flow management. Manufacturing facilities are established, and the company may already be thinking about expanding internationally. Amounts vary, depending on how long the bridge financing is meant to last, but generally it is in the range of $5 million to $25 million.
Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 646). Wiley. Edición de Kindle.
Compound Option
A compound option is an option on an option. In other words, a compound option allows its owner the right but not the obligation to pay additional money at some point in the future to obtain an option.
Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 646). Wiley. Edición de Kindle.
