Week 3 Flashcards
What is venture capital?
- VCs act as financial intermediaries
- VCs invest in private companies
- VCs take active roles in monitoring and helping with the management of the portfolio companies
- VCs aims to maximize its financial return
- VC invests in entrepreneurial companies with growth potential
Different between VC and others
VC take investors money to invest while business angels are highly wealthy individuals that investor their own money
VC are not hedge/mutual fund, it falls under the category of private equtiy where funds are pooled from investors to acquire stocks in companies which are not listed on public trade exchange
It differ from crowdfunding in being an active investor
How is VC managed?
VC is organized as Limited Partnership (investors with limited liabilities who fund capitals)
The duration of LP is usually 10 years and they are locked in, while GP acts as an agent for the LP and choose the companies to invest in.
solutions to misalignment of interest between LP and GP?
- Limited lifespan (VC cannot keep money forever)
- LPs can withdraw from funding beyond the initial investment to set up the partnership
- Incentive compensation: GPs receive 20% of the profits (carried interests)
- Skin in the game: GPs contribute capital to the fund
- Contracts and reputation considerations prohibit general partner to self-deal
How do VC add value?
- GP has to add value to cover their compensation by screening investment and negotiate deals
- GP makes good decision and monitor portfolio companies
- VCs obtain board seats in the portfolio companies. Thus, there would be higher level of strategic involvement
- VCs with better experience would add more value
Corporate venturing
Big firms establish their own in-house venture to invest in external start-ups
- They benefit from portfolio company’s innovations
- They dont have to be active, but co-investing with other VC (syndication)
- Firms might benefit if the portfolio company develops products that is a complement to the existing product
Types of securities
- Debt: lending firms money in exchange of periodically payment and principle amount at maturity
- Equity: Buying shares in return of dividend if the project is successful
- Convertible Debt: works like the debt, however, it can be turn into pre-specified fraction of equity to receive dividend instead
Which securities VC use in practice
Common stocks: risky stock that offers unstable dividend and no priority on the claim of asset. However, common stockers have voting rights
Preferred stock: safe stocks that offer fixed dividend and has the priority on the claim of assets. However, no voting rights
Convertible Preferred Stocks: preferred stock that gives the holder the option to convert their preferred shares into a specified number of common shares
Seed capitals
Capitals that needs to be collected before being able to secure VC fundings
- Angel investors: Business angels are high net worth individuals who invest a portion of their wealth in high-risk, high-return ventures
(early stages and close to home) - Accelerators/Incubators: organisations that actively supports the process of creating and developing new businesses by offering services and resources and getting paid.
- Crowdfunding: way of funding in which many individual investors pledge a small amount of capital through internet. There are four different crowdfunding:
Reward-based: receiving products and additional services
Equity-based: receiving a certain amount of venture’s equity
Debt-based: investors buy small tranches of debt issued by the company (accounts for 92.7%)
Donation-based: invest in NGO and charities
4.Initial Coin Offerings: provider issues digital coins to investors. The coin can represent a prepaid entitlement to the services developed or share of the projects in the future.
Types of exists
IPO: company goes public selling its shares
Acquisition: the start-up, and all of its equity, including the VC stake is sold to bigger company
