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Early-Stage Financing and Venture Capital

Venture capital is financing provided to new, often high-risk companies, and comes from venture capital firms. Venture capitalists invest their own funds raised from outside investors and take an active role in advising their portfolio companies. They seek an exit within 5-7 years via IPO or acquisition. Startups typically go through several rounds of venture financing as they progress from concept to commercialization. While the venture capital market is large, access is limited due to its "introduction" nature. Venture financing is also expensive for startups as venture capitalists take a significant equity stake and seats on the board.

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Ta Thi Minh Chau
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48 views6 pages

Early-Stage Financing and Venture Capital

Venture capital is financing provided to new, often high-risk companies, and comes from venture capital firms. Venture capitalists invest their own funds raised from outside investors and take an active role in advising their portfolio companies. They seek an exit within 5-7 years via IPO or acquisition. Startups typically go through several rounds of venture financing as they progress from concept to commercialization. While the venture capital market is large, access is limited due to its "introduction" nature. Venture financing is also expensive for startups as venture capitalists take a significant equity stake and seats on the board.

Uploaded by

Ta Thi Minh Chau
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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1.

Early-Stage Financing and Venture Capital


One day, you and your friends come up with a new idea of a computer software
product. To develop it, you need to hire programmers, buy computers, rent offices. But
you are all students and your assets cannot start up a company. How to deal with this
situation?
There may be 2 ways to deal with this situation:
 Go to the bank for a loan
 Get some money from other people. This way is also called OPM (other people's
money)
One group of potential investors goes by the name of angel investors, or just angels.
They can be your friends, family, individuals or group of individuals who have invested
in a number of previous ventures.

a. Venture Capital
The term venture capital does not have a precise meaning, but it generally refers to
financing for new, often high-risk, ventures.
3 characteristics of venture capitalist:
 VCs are financial intermediaries that raise funds from outside investors.
 VC firms are typically organized as limited partnerships
 This characteristic separates VCs from angels because angels typically invest
their own money.
 VCs play an active role in overseeing, advising, and monitoring the companies in
which they invest.
 Members of VC firms frequently join the board of directors. The principals of VC
firms usually experienced in business while the enterpreneurs of start-up
companies are knowledgeable about the product, but lack of experience in
business.
 VCs generally do not want to own the investment forever.
 Rather, VCs look for an exit strategy, such as taking the investment public or
selling it to another company.
 This characteristic is determining the nature of typical VC investments.
Venture Capital Investment in 2020

Commercial Services
5% Consumers
Energy Goods&Recreation
1% HC3%Devices&Supplies
5%
Software
31%
HC Services&Systems
7%
IT Hardware
3%
Media
2%

Others
Pharma&Biotech 25%
17%

Source: National Venture Capital Association Yearbook 2021 (Pitchbook Data, Inc)

b. Stages of Financing
 Seed money stage
A small amount of money to prove a concept or develop a product.
 Start-up
Funds are likely to pay for marketing and product refinement.
 First-round financing
Additional money to begin sales and manufacturing.
 Second-round financing
Funds earmarked for working capital for a firm that is currently selling its product but still
losing money.
 Third-round financing/ Mezzanine financing
Financing for a firm that is at least breaking even and contemplating expansion.
 Fourth-round financing/ Bridge financing
Financing for a firm that is likely to go public within 6 months.

2020 US VC Deals by Stage ($B)


Angel & Seed

Early VC

Late VC

Source: NVCA 2021 Yearbook, Data provided by PitchBook

c. Some venture capital realities


 Large venture capital market, access to venture capital is very limited
 Venture Capitalist rely on informal networks of lawyers, accountants, bankers,
and other venture capitalists to help identify potential investments
 Personal contacts are important in gaining access to the venture capital market
 an “introduction” market
 Venture capital is that it is quite expensive
 demand (and get) 40 % or more of the equity in the company
 hold voting preferred stock
 demand (and get) several seats on the company’s board of directors and may
even appoint one or more members of senior management.
2. The Pubic Issue
The basic steps for issuing securities:
1) Management must obtain permission from the Board of Directors
2) Firm must file a registration statement with the SEC
 This statement contains a financial history, details of the existing business,
proposed financing, and plans for the future.
 Registration statements don’t have to be filed if the loan will mature in less than
nine months or the issue involves less than $5 million
3) The SEC examines the registration during a 20-day waiting period
 A preliminary prospectus, called a red herring, is distributed during the waiting
period
 If there are problems, the company is allowed to amend the registration and the
waiting period starts over
 Securities may not be sold during the waiting period
4) The price is determined on the effective date of the registration
5) Tombstone advertisements are used during and after the waiting period
 contains the name of the issuer
 provides some information about the issue and lists the investment banks (the
underwriters) involved with selling the issue
 In recent years, the use of printed tombstones has declined, in part as a cost-
saving measure.

3. Alternative Issue Methods


ISSUE NEW
SECURITIES

PUBLIC ISSUE PRIVATE ISSUE

firm is required to the issue is sold to fewer than 35


register the issue with investors
the SEC
registration statement is not
required

GENERAL CASH RIGHTS OFFER


OFFER

A company’s first public equity issue is referred to as an initial public offering (IPO)
All initial public offerings are cash offers

A seasoned equity offering (SEO) refers to a new issue where the company’s securities
have been previously issued
May be made by either a cash offer or a rights offer

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