Other Areas Flashcards
Venture Capital
Seed, spin-out, start-up, other early stage and expansion/development/growth stages
Private Equity
Venture capital + buyouts/ buyins and replacement capital/ secondary purchases
Purpose and content of business plan
Executive summary – one page summary of the case for the fund (see next slide)
Opportunity – rationale behind fund’s investment strategy and the factors that will underpin its success
Management – bios of key execs, management structure, team’s track record Strategy – definitive statement of investment strategy.
Policy – limits on what fund may or may not do (min/max investment, stage, geography)
Execution – deal origination, selection and approval
Track record – detail review of historic investment performance, analysis at deal by deal level for investors who are seriously interested.
Valuation method. IRR performance of fund
Terms – (see slide on summary of terms): Outline of key terms such as Fund size. First close (amount at which fund can start making investments).GP participation in fund (amount GP is expected to contribute to fund , usually between1% to 5% of fund). Minimum LP commitment. Hurdle rate. Management fee. Term of fund (usually 10 years) and extensions to fund life (usually 1 or 2 years if LPs agree).
Evaluation of investment proposition
Initial / internal due diligence
Monitoring the investment
Monthly management pack
Weekly / daily KPIs and on-line reporting
Informal reporting and communication
Seat on board / board minutes
Consulted on (with right of veto in some circumstances) on key decisions affecting company
Aims to add value to investment (eg expansion into new markets/overseas, intros to customers and strategic partners)
Shares best practice amongst portfolio companies
Acts as a business partner (if “Hands-On”).
Adding value
Sounding board for strategic and development decisions – entering new markets, overseas expansion, acquisitions, hiring new management
Introductions to potential customers, suppliers, headhunters, acquisition candidates, even other VCs
Negotiating future financing rounds with other VCs
Softer skills in coaching and mentoring entrepreneurs and teams
Provide credibility/status and focus and support
Studies by EVCA and BVCA confirm the recognition of this support by entrepreneurs and management teams
No longer just turn up for board meetings!
Exits
Trade sale - Good for investors as:
- likely to obtain premium from buyer
- competitive bids maximise price achieved
- cash paid for purchase, rather than shares
Potential conflicts with management
IPO
Advantages
- Realisation of owner’s capital
- Finance available for expansion
- Marketable shares available for acquisitions
- Enhancement of status and public awareness
- Increased employee motivation via share incentive schemes
Disadvantages
- Possible loss of control
- Continuing obligations
- Increased scrutiny from shareholders
- Perceived emphasis on short-term profits and dividend performance
- High costs of gaining quotation
Secondary Deals
Repurchase
Write-off
Types of business angels
Operational Expertise Angels
Financial Return Angels
Guardian Angels
Professional Entrepreneur Angels
Danger Signs in monitoring the investment
Lack of response to changing environments
Stress/dissent within team
Fixed price contracts
Increasing fixed costs
Cash flow issues
Bank covenant breaches
Failing to meet interest payments
Failing to meet dividend payments
Increasing overseas competition
Over-trading
Deteriorating credit control
Uncontrolled capital expansion
Inaccurate / late management accounts
Autocratic management
Financial impropriety
Early success but no staying power
Over-expansion
High turnover of employees
Extravagant executive lifestyle
Dependence on too few customers/suppliers
