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Private Equity > External Financing for Ventures > Flashcards

External Financing for Ventures Flashcards

1
Q

what is a cap table

A

shows number of shares, fraction of equity and value of equity

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2
Q

what are the two simple methods VC firms use for pricing deals for investing into start up companies

A

NPV and IRR

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3
Q

What is the difference between NPV and IRR

A
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4
Q

how do you survive financially during growth stage

A

rely on internal cash flows: cash flow management
rely on external financing: VC method with rounds of financing

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5
Q

what is cash burn rate

A

refers to how quickly a venture uses its cash reserves

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6
Q

what is cash build rate

A

refers to how quickly a venture builds cash balances from collections on sales

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7
Q

what is net cash burn rate

A

net cash outflow over a fixed period

= cash burn - cash build

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8
Q

what is a reasonable burn rate

A

you should keep 10-12 months of cash runway at all times, so a reasonable burn rate is 1/12th of available cash

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9
Q

why is a high cash burn rate not necessarily bad

A

scale up in production, readiness for higher valuation

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10
Q

how to control/reduce cash burn rate

A

1) complimentary resources
2) thoughtful hiring
3) strategic expansion
4) healthy growth and market entry

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11
Q

what is having less than 6 months of runway bad

A

1) limited negotiator power for entrepreneurs
2) signals poor financial planning
3) erodes investors confidence in the leaderships ability to manager company survival

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12
Q

what to do when running low on cash?

A

1) adjust payment schedule with partners/vendors/suppliers
2) take a short term loan from bank
3) participate and win pitch competition
4) apply for grants

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13
Q

what are some sources of capital for startups

A

1) founders
2) family and friends
3) angels
4) VCs
5) strategic investors
6) customers
7) crowdfunding
8) suppliers
9) banks
10) government

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14
Q

founders key info for funding

A

bootstrapping
- savings
- personal loans (second mortgage)
- credit cards

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15
Q

family and friends key info for funding

A
  • mixing business and private life
  • can be debt like or equity like
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16
Q

angels key info for funding

A

different types
- many small investors (found through personal network)
- few large investors (hard to find)
- angel groups (easy to find, hard to convince)

angels are not motivated solely by profit, more persuaded by entrepreneurs drive to succeed, persistence and mental discipline

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17
Q

VC’s key info for funding

A

back up company with professional advice and bring prestige to company. Take majority control and then kick out founding entrepreneurs

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18
Q

customers key info for funding

A

prepayment on customer order

often considered the best funding

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18
Q

strategic investors key info for funding

A

large companies use their resources to invest in relevant startups. investments are aligned with their own strategic goals and diversification

potential for conflict of interest: influence strategic direction of the startup

19
Q

crowdfunding key info for funding

A

process of financial ideas, venture and projects by gathering funds from a large network of people. Social media version of fundraising

20
Q

suppliers key info for funding

A

getting discounts from suppliers is an implied form of getting funding. Typically requires repeat purchasing and good customer standing - hard to obtain for startups

21
Q

banks key info for funding

A

loan officers are not in the business of determining value of start ups. Minor source of funding

22
Q

government key info for funding

A

time and bureaucracy costs of applying and complying with rules is substantial

23
Q

founders, family and freinds: pre deal considerations (accessibility, screening, negotiation) and post deal considerations (control, value adding and time horizon)

A

accessibility: easy
screening: limited
negotiation: founder driven
control: passive
value added: little
time horizon: patient

24
Q

angels: pre deal considerations (accessibility, screening, negotiation) and post deal considerations (control, value adding and time horizon)

A

accessibility: mostly difficult to find
screening: detailed and personal
negotiation: investor driven
control: passive to active
value added: good bad and ugly
time horizon: 2-7 years

25
Q

vc: pre deal considerations (accessibility, screening, negotiation) and post deal considerations (control, value adding and time horizon)

A

accessibility: need introduction
screening: detailed and professional
negotiation: investor driven
control: mostly active
value added: good bad and ugly
time horizon: 2-7 years

26
Q

strategic investors: pre deal considerations (accessibility, screening, negotiation) and post deal considerations (control, value adding and time horizon)

A

accessibility: need business rational
screening: detailed and strategic
negotiation: investor driven
control: direction and exit
value added: synergies
time horizon: 2-4 years

27
Q

customers: pre deal considerations (accessibility, screening, negotiation) and post deal considerations (control, value adding and time horizon)

A

accessibility: commercial basis
screening: product focused
negotiation: product driven
control: passive
value added: product feedback
time horizon:product delivery

28
Q

crowdfunding: pre deal considerations (accessibility, screening, negotiation) and post deal considerations (control, value adding and time horizon)

A

accessibility: easy
screening: product focused
negotiation: crowd driven
control: passive
value added: product feedback
time horizon:product delivery

29
Q

suppliers: pre deal considerations (accessibility, screening, negotiation) and post deal considerations (control, value adding and time horizon)

A

accessibility: commercial basis
screening: transaction based
negotiation: relationship based
control: passive
value added: none
time horizon: short term but repeated

30
Q

banks: pre deal considerations (accessibility, screening, negotiation) and post deal considerations (control, value adding and time horizon)

A

accessibility: relationships help
screening: formal and score based
negotiation: standardized and investor driven
control: passive
value added: little
time horizon: varied

31
Q

government: pre deal considerations (accessibility, screening, negotiation) and post deal considerations (control, value adding and time horizon)

A

accessibility: easy to research
screening: formal and administrative
negotiation: standardized
control: passive
value added: none
time horizon: patient

32
Q

what stages fall under venture financing

A
  • development stage
  • startup stage
  • survival stage
  • rapid growth stage
33
Q

what stages fall under seasoned financing

A

early maturity stage

34
Q

what type of financing and what major sources are involved with development stage

A

seed financing; entrepreneurs assets and family and friends

35
Q

what type of financing and what major sources are involved with startup stage

A

status financing; entrepreneurs assets, family and friends, business angels, venture capitalists

36
Q

what type of financing and what major sources are involved with survival stage

A

first round financing; business operations, venture capitalists, suppliers and customers, government, commercial banks

37
Q

what type of financing and what major sources are involved with rapid growth stage

A

second round financing, mezzanine financing, liquidity stage financing ; business operations, suppliers and customers, commercial banks, investment banks

38
Q

what type of financing and what major sources are involved with early maturity stage

A

obtain bank loans, issue bonds, issue stocks; business operations, commercial banks, investment banks

39
Q

what is seed financing

A

funds needed to determine whether an idea can be converted into a viable business opportunity

primary source: entrepreneur assets, family members and friends

40
Q

what is startup financing

A

funds needed to take a venture from having establish a viable business opportunity to initial production and sales

primary source: VC

41
Q

what is first round financing

A

early funds provided during survival stage to cover the cash shortfall when expenses and investments exceed revenue

primary source: suppliers and customers trade credit, government, commercial banks

42
Q

what is second round financing

A

financing for ventures in their rapid growth stage to support investment in working capital

43
Q

what is mezzanine financing

A

funds for plant expansion, marketing expenditures, working capital, and product or service improvement

44
Q

what is liquidity stage financing

A

temporary financing needed to keep the venture afloat until the next offering

45
Q

what is seasoned financing

A

the offering of a security by a firm that has previously offered the same or substantially similar securities

Private Equity (4 decks)

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