Semifinals Flashcards
Entrepreneurial finance differs from corporate finance for EGCs in four significant ways
Rapid Growth and cash consumption
Intangible Assets
High risk and High Reward
Talent Retention
requires substantial investments in
fixed assets and working capital
Rapid growth and cash consumption
Many EGCs possess valuable intellectual property rights, like patents, which are challenging to finance externally.
Intangible Assets
This growth consumes more cash than they generate, necessitating external financing.
Rapid Growth and Cash Consumption
EGCs often work with untested technologies, leading to both high failure risks and potential high rewards
High Risk and High Reward
EGCs must attract and retain highly skilled talent while minimizing cash outflow, often utilizing stock-option grants for compensation.
Talent Retention
The distinctive features of entrepreneurial
finance are:
Heavy reliance on Equity Financing
Information Problems in Financial Contracting
External Equity Financing
Private Equity
Initial Sources of Financing
EGCs rely heavily on equity financing due to the difficulty of financing growth opportunities with borrowed money.
Heavy Reliance on Equity Financing
Financial contracts between EGCs and financiers are complex and riddled with information problems.
Information problems in Financial Contracting
EGCs must seek _______
because their investments far exceed their internal funding
capabilities.
External Equity Financing:
Privately held EGCs commonly depend on _______, including capital investments by owners and funding
from venture capitalists.
Private Equity
Many EGCs initially rely on personal equity
financing and loans from financial institutions, with personal
guarantees often involved.
Initial sources of financing
is a professionally managed fund raised to invest in rapidly growing private companies, often involved in bringing new scientific discoveries to market.
Venture Capital
Types of Venture Capital Funds
Institutional venture capital funds
angel capitalists
are formal entities with full-time professionals seeking and funding promising ventures
Institutional venture capital funds
are wealthy individuals making private-equity investments more informally.
angel capitalists
play a significant role, often rivaling venture capitalists in total equity investment to U.S. private businesses.
Angel Capitalists
four categories of institutional venture capital funds
Small Business Investment
Companies
Financial Venture Capital Funds
Corporate Venture Capital Funds
Venture Capital Limited Partnerships
Federally chartered corporations established under the Small Business Administration Act of 1958.
Small business Investment Companies
They have the ability to borrow from the U.S. Treasury, raise equity capital from the Treasury in the form of preferred equity interests, and can organize as limited partnerships.
Small business investment Companies
Subsidiaries of financial institutions, particularly commercial banks
Financial Venture Capital Funds
They nurture companies that may become profitable customers of the parent organization.
Financial Venture Capital Funds
Leverage the financial expertise and contacts of the corporate staff.
Financial Venture Capital Funds
Established by nonfinancial corporations aiming to gain access to emerging technologies.
Corporate Venture Capital Funds
Make earlystage investments in high-tech firms to stay competitive
Corporate Venture Capital Funds
Established by professional Venture Capital Firms and serve as general partners
Venture Capital
Limited Partnerships
Handle investing, managing, and ultimately liquidating assets.
Venture Capital Limited partnerships
are the dominant
players in the venture capital industry.
Limited Partnerships
control the majority of
industry resources, and their influence in
fundraising appears to be growing.
Limited Partnerships
types of corporate sponsors
Financial funds
corporate funsd
venture capital funding came either from
corporate sponsors
wealthy individuals
venture capitalsits use __ to minimize their risk exposure
Staged financing
protect the venture group’s ownership rights in the event that the firm sells new equity under duress
Ratchet Provisions
provide incentives for company managers in virtually all venture capital deals.
Stock Option Plans
Through selling the company they hold back to the entrepreneur/founders, known as
Redemption Option
is a later stage investments and funding for management buyouts in Europe
Private Equity Investments
refers only to buyout funds in the united sates
Private Equity
The key venture capital markets outside the United States and Western Europe are
Canada
Israel
Japan
China
India
policies led to its venture capital system that is based on funds sponsored by labor unions, though this has changed over the past decade.
Canadian Government
has achieved the greatest success in venture capital because it is routinely has the highest level of R&D spending as a percent of GDP.
Israel
has a financial specialty referred to as “venture capital,” but most of the firms
involved are commercial or investment bank subsidiaries that make few truly
entrepreneurial investments.
Japan
is the fastest-growing major economy in the world,
China
is the most interesting and promising private equity market in the
world today
India
