Lesson 5-6

Question 1

Process of venture financing

Answer 1

1. Deal origination
2. Screening
3. Evaluation
4. Deal negotiation
5. Post invesmtment Activity
6. Exit plan

Question 2

Early Stage

• VC provide seed capital for translating idea into business proposition
• Investor will investigate through market research, conduct technical and economic feasibility

Answer 2

Seed Capital

Question 3

Early Stage

• Organization is being set up
• The idea or product gets its form
• Entrepreneur should provide clear business plan and market analysis

Answer 3

Start up Capital

Question 4

Early Stage

• Refers to the stage where the product is launched in the market
• Main goals – capture market share from competitors; minimize losses to reach break even

Answer 4

Second round finance

Question 5

Later Stage

• Purchase of new equipment
• Expansion of marketing and distributing facilities
• Launching of new products to new regions

Answer 5

Development Capital

Question 6

• New or larger factories and warehouses
• Production capacities
• New products and new markets
• Purchasing existing business

Answer 6

Expansion

Question 7

Later Stage

VC provide funds to enable the current management of a company to acquire majority of the shares for the existing shareholders and take control of the company
(The buyers have more knowledge about the company and its true potential compared to seller)

Answer 7

Management buyout

Question 8

Later Stage

Funds are provided to enable an outside group of managers to buy an existing company
* (Involves 3 parties: Management team. Target company and VC)
* (Less popular since it is difficult for the new management to assess the actual potential of the target company)

Answer 8

Management buyin

Question 9

Later Stage

• Funds provided to purchase existing shares in a company from other shareholders

Answer 9

. Replacement Capital

Question 10

Later Stage

• When established enterprise becomes sick, it needs finance as well as management assistance for major restructuring to revitalize growth of profits

Answer 10

Turnaround Finance

Question 11

The firms conduct thorough research and analysis to evaluate the startup’s business model, market potential, team, and financials.

Answer 11

DUE DILIGENCE

Question 12

• Companies get screened out for two reasons – The opportunity does not fit the fund’s mandate or criteria
• Business stage (idea stage, early stage, etc.)
• Geographic region
• Size of deal

Answer 12

Screening

Question 13

– Some funds will only review opportunities that have come via a referral from a trusted source

Answer 13

Industry sector

Question 14

Founders and Team

– Capable of sustained intense effort
– Able to evaluate and react to risk well
– Articulate in discussing venture
– Attends to detail
– Compatible personality

Answer 14

Personality

Question 15

– Thoroughly familiar with market
– Demonstrated past leadership
– Track record relevant to venture
– Referred through trustworthy source

Answer 15

Experience

Question 16

Mentally walk through the business model generation framework

Answer 16

Business Model

Question 17

• Can the company articulate their value proposition simply?
• Can the team explain how they will go to market?
• Do they have a good understanding of the competition?

Answer 17

Go-to-market

Question 18

*what kinds of moves are incumbents making?
* How might a startup disrupt the market?

Answer 18

Market size

Question 19

• Look up people on LinkedIn who know the founders

Answer 19

Team references

Question 20

• Call a few people who know the industry well

Answer 20

Industry references

Question 21

• How many users/customers do they have?
• How does that compare to other startups that operate in the same/similar space

Answer 21

Custoemrs/Users

Question 22

• Where is the product/ Service going?
• Does the team have a competitive/ambitious road map?

Answer 22

Product road map

Question 23

when two or more investors co-invest in the same startup, can offer several advantages for venture capitalists.

Answer 23

Syndication

Question 24

• It provides access to more deals and better deal flow by leveraging the network and reputation of co-investors.
• It enables diversification of portfolios by spreading capital across more startups and sectors, reducing exposure to any single failure.
• It offers the opportunity to learn from other investors by exchanging insights, feedback, and best practices with co-investors.
• It allows for sharing the due diligence and post-investment work by dividing tasks and responsibilities of evaluating, negotiating, and supporting the startups you invest in.

Answer 24

Benefits of Syndication

Question 25

* It can be costly and challenging, with drawbacks such as dilution of ownership and control, potential conflicts and misalignment, higher transaction costs and complexity, and reduced differentiation and branding. * You must share the equity and board seats with your co-investors, which limits your influence. * You may have different interests than your co-investors, leading to disagreements over the strategy, valuation, or exit of the startup. * Coordinating and communicating with more parties can be complex, requiring term sheets, contracts, and syndicate agreements. * You may miss out on the opportunity to establish a unique identity in the market or build a strong relationship with the founders.

Answer 25

Drawbacks of Syndication