Stages of Financing and Venture Capital

Question 1

What are the Types of business financing - time dimension?

Answer 1

According to time horizon, business financing during development can be classified into:

1. Financing in early stages – first business financing form, with two options available: seed and start-up capital.
2. Development financing – financing aimed at fast expansion of business. Development capital is easier to obtain than in early stages.
3. Acquisition financing – financing acquisition of another company through classical acquisition, buy-off with leverage and going private.

Question 2

What is Risk (Venture) Capital?

Answer 2

One of the least explored fields in entrepreneurship, referring to the part of ownership capital under professional management, established from wealthy partners’ funds.

Investor takes shareholders participation through shares, guaranties or bonds with conversion, pursuant to which he/she takes active participation in supervision over each enterprise.

Goal is to achieve high return on investment in the form of capital gains yielded by selling shares, instead of collecting revenues from interest or dividend.

Question 3

What is the Risk (Venture) Capital Market and what are the types?

Answer 3

Risk capital markets are the markets providing debt and capital financing for financially uncertain ventures. There are three risk capital markets, available for enterprise growth financing:
1. (Formal) risk capital market
2. Informal risk capital market
3. Public stock market (stock exchange)

Question 4

What are the features of Formal Venture Capital Market?

Answer 4

1. Small private risk capital companies
2. Sectors of major corporations, investing in new ventures
3. State risk capital funds
4. Risk capital funds under universities sponsorship

Question 5

What is the definition of informal risk capital - business angels?

Answer 5

Informal risk capital consists of private persons – invisible groups of wealthy investors – business
angels, looking for the opportunities for share-type investments in various ventures.

One or two contracts are being made annually, with the investments varying from USD 10,000 to USD 500,000, with USD 175,000 average. As company matures, expected return drops – from ten-fold return for start-up, down to three-fold return for companies over 5 years. Angels are patient and have no issues with waiting for as long as 7 to 10 years to get return on their investment.

Question 6

What are the stages of Investment process model?

Answer 6

1. Source of business cooperation - The circumstances in whish the entrepreneur and investor make contact.
2. Selection of business partner - Initial assessment of the profitability of cooperation
3. Evaluation of business cooperation - Detailed assessment of risk and return on investment
4. Structuring of business cooperation - Investor’s strategy of entering and exiting business
5. Post investment cooperation - Monitoring, control and support from investors