Define venture capital
Equity investments in new private companies
What are the two types of IPOs?
Primary offering: new shares are sold to raise additional cash
Secondary offering: existing shareholders cash in by selling part of their equity holdings
What are the costs assosciated with IPOs?
Admin (legal etc), Direct (Spread for underwriters) and Underpricing (money left on the table, hidden cost where a security is fundamentally undervalued)
What do smaller, newer companies rely on on to fund venture capital?
Family / friends and bank loans (sometimes angel investors)
How do venture capital firms operate?
Identify promising start-ups, financing their operations in exchange for a large sum of the firm’s stock, actively working with the company as they grow.
Case study: when was venture capitalism booming?
During the dotcom bubble, when it burst it slumped. On its way back up now
Typically, venture capital funds are a limited private partnership with a fixed life of…
10 years
who is the general partner in a venture capital fund? what do they do?
the management company of the venture capital firm-> make and oversee the investments, receiving a fixed fee and share of profits
who are the limited partners in a venture capital fund?
pension and mutual funds and other wealthy private investors
What is the investment policy for venture capital firms?
- accepting high uncertainty if there is a slight chance a company could go big
- identify failed investments early and accept the loss rather than chasing it.
Describe the two ways in which venture capitalists may cash in on their investments
- sell their shares to a larger firm
- or if entrepreneurs want to keep control of company they may just sell on stock market
Name some benefits/ motives of IPOs
- main: raise new capital
- enable shareholders to cash out
What is an underwriter?
firms that buy an issue of securities from a company and resell it to the public and also provide financial advice (eg Goldman Sachs)
What must you do in order to initiate an IPO?
- prepare registration statement (firms current and historic state and proposed projects)
- prospectus publication
- arrange road show for potential investors
- build a book of likely orders (Can help decide issue price)
when is a stock under-priced during an IPO?
when it closes at a price higher than the issuing price
When else can a company issue shares?
- general cash / public offer (by an already public company)
- rights issue / privileged sub (issues offered first or only to current stockholders)
How do you calculate the value of a rights offering?
Subtract the new share price from the old share price
How do you work out the value of a single share?
divide the market value by the number of shares
What is a green shoe option?
option that allows underwriters to buy additional stock from company at the IPO
what is the best-effort basis?
underwriter promises to sell as much as poss but can’t guarantee selling all
What is an all-or-none arrangement?
- either the entire issue is sold at the offering price, or the deal is called off and the issuing company recieves nothing
What is money left on the table?
- represents additional funds the company would have raised
