Archives

Venture Capital Firm

Venture Capital Firm

Definition

Venture Capital Firms usually invest in companies that are looking for large investments with potential for high, rapid growth and scalability. They invest large sums of money (usually in the millions of dollars) into startups, usually on the behalf of 3rd party investors. VC Firms are incredibly selective, usually investing in one firm out of several hundred. They tend to look for companies that are already launched and growing, not traditional small businesses in the prelaunch phase.

Venture Capital Firms make their money by owning large stakes of equity in the companies they are invested in. Because this means that they will not be gaining their returns until they sell their shareholdings, profits depend on the company’s growth. With the high risk involved, these firms tend to be deeply interested in the company’s development and give considerable managerial and technical advice and counsel.

Structure

Firms are typically structured as partnerships, the general partners of which serve as the managers of the firm and will serve as investment advisers to the venture capital funds raised. Venture capital firms in the United States may also be structured as limited liability companies, in which case the firm’s managers are known as managing members. Investors in venture capital funds are known as limited partners. This constituency comprises both high net worth individuals, known as venture capitalists, and institutions with large amounts of available capital, such as state and private pension funds, university financial endowments, foundations, insurance companies, and pooled investment vehicles, called fund of fund.

Roles

Within the venture capital industry, the general partners and other investment professionals of the venture capital firm are often referred to as “ venture capitalists” or “VCs”. Typical career backgrounds vary, but broadly speaking venture capitalists come from either an operational or a finance background. Venture capitalists with an operational background tend to be former founders or executives of companies similar to those which the partnership finances or will have served as management consultants. Venture capitalists with finance backgrounds tend to have investment banking or other corporate finance experience.

Although the titles are not entirely uniform from firm to firm, other positions at venture capital firms include:

1. Venture partners – Venture partners are expected to source potential investment opportunities (“bring in deals”) and typically are compensated only for those deals with which they are involved.

2. Principal – This is a mid-level investment professional position, and often considered a “partner-track” position. Principals will have been promoted from a senior associate position or who have commensurate experience in another field such as investment banking or management consulting.

3. Associate – This is typically the most junior apprentice position within a venture capital firm. After a few successful years, an associate may move up to the “senior associate” position and potentially principal and beyond. Associates will often have worked for 1–2 years in another field such as investment banking or management consulting.

4.Entrepreneur-in-residence (EIR) – EIRs are experts in a particular domain and perform due diligence on potential deals. EIRs are engaged by venture capital firms temporarily (six to 18 months) and are expected to develop and pitch startup ideas to their host firm (although neither party is bound to work with each other). Some EIR’s move on to executive positions within a portfolio company.

Venture Capital

Venture Capital

Definition

Venture Capital, often abbreviated as VC, is the financial capital that is invested into startup companies with high-risk and high-potential. It is a division of private equity and is sometimes referred to as “seed money”. Venture Capital is given to companies through the route of Venture capital firms or by individual venture capitalists.

Structure

Venture capital investment is often organized through Venture capital firms. These firms are typically structured as partnerships, the general partners of which serve as the managers of the firm and will serve as investment advisers to the venture capital funds raised. Venture capital firms in the United States may also be structured as limited liability companies, in which case the firm’s managers are known as managing members. Investors in venture capital funds are known as limited partners. This constituency comprises both high net worth individuals and institutions with large amounts of available capital, such as state and private pension funds, university financial endowments, foundations, insurance companies, and pooled investment vehicles, called fund of fund.

Venture Capitalist

Venture Capitalist

Definition

A venture capitalist, also known as VC, is a person or an investment firm that makes venture investments, and these venture capitalists are supposed to bring managerial and technical support as well as capital to the objects of their investments. Venture capitalists possess the core skill to identify novel technologies that have potential to generate high commercial values. Venture capitalists tend to work within venture capital firms and partnerships. Venture capital is typically sought by high-growth startups looking for the next round of funding. These businesses are usually a higher risk, but also have a higher pay off with success. Business seeking this type of funding are usually too small for a bank loan and have a relatively short operating history.

Types

VCs can be classified into different types according to different factors. Some venture capitalists tend to invest in new ideas while others prefer to invest in established companies that need to grow or go public. Some VCs invest solely in certain industries. Others prefer investing locally while others prefer investing nationwide. The expectations of venture capitalists also vary. Some want quick public sales for their invested companies, or expect fast growth. Others look for balance between growth and risk.

Work Part time, Offer Consulting

Work Part time, Offer Consulting

Work Part-Time

Although time will be tight when starting a new business, many entrepreneurs will work part-time to raise money needed for their professional and private lives.

It would be smart if you could find work in the industry you want to start your business in. By finding a complimentary job, you can learn skills and jumpstart ideas from your daily routine that can be applied at your own company. You can also meet people that may have connections that will help you later on in your career – connections to legal advice, web designers, and office supply rentals. If you can build good relationships with your coworkers, they will be far more inclined to help you when your business launches with connections, or even by being your first customers.

Consulting

Many companies can generate extra cash by offering consulting services to other firms. Being an expert in your field, you can use your knowledge to help other struggling small businesses owners through a small fee that you can flip and instead use towards your own efforts.

Besides the obvious extra cash flow, added benefits include learning first-hand what customer needs and desires are. This new knowledge can help to improve your product as well as allow you to create new relationships and networks with other business owners.

Revenue-Based Financing

Revenue-Based Financing

Definition

Business Revenue Financing, also known as Revenue-Based Funding (RBF), is a means of securing funding by giving investors a percentage of total future revenue based on previous (and projected) sales revenue figures. Often described as a hybrid of the traditional equity funding model, it provides the entrepreneur a funding source based on the performance of the company without having to actually sell equity, and at the same time provides the investor the opportunity to benefit directly from company growth without buying equity in the company. Also different from the standard debt model, the entrepreneur also only pays on realized income revenue, so the payments are variable and tied to the company sales numbers. If the company has zero revenue in one month, no money is owed to the investor for that month. RBF is considered a relatively new form of funding and is continuing to gain in popularity.

RBF is good for companies that are selling product but lack assets to secure bank loans. It is also an attractive option for companies with variable revenue and financing needs, as the payments will increase or decrease according to revenue streams, allowing them to vary with your needs. Companies like restaurants, manufacturing, or brick-and-morter-heavy start-ups may not be as good a fit for this type of financing. This type of funding is typically found through angel investors or firms that specialize in RBF.

Advantages

Advantages for investors are the high upside potential without the need for exit to realize return. On the entrepreneurial side, there is no required company evaluation or management guarantees with the contract, and the owner retains full control and ownership of the company. The terms for revenue-based financing are based on previous revenue numbers as well as forecasting. They typically include a set percentage of revenues which is paid out for the life of the company of until an agreed upon overall ceiling cap is reached.

Private Equity

Private Equity

Definition

A Private Equity Firm is a firm that manages the investment of equity securities in corporations not listed on the public exchange through various strategies. Each firm employs several Private Equity Funds, which are the projects jointly led by the firms and limited partners. These limited partners are often public or corporate pension funds, foundations, insurance companies, wealthy individuals, etc. Private Equity Firms receive shares in the profits earned from each of the funds they manage as well as administration fees for the investment strategies they engage. PE is normally catered towards more matured companies rather than early stage business.

Private Equity Firms are known to buy and invest in underrated and undervalues companies with little stock power. Once bought, the companies are then removed from the public stock market so that the private equity firms can make shifts in internal procedures and management without releasing information to stockholders. Similar to house-flipping, the private equity firms implement common strategies to renew the company and then will either bring in new investors that will buy the company for a desirable profit, or take the company public again in the stock market.

Common Investment Types

1. Growth Equity (also called growth capital and expansion capital): Investments that focus on slightly matured companies that are looking to grow and restructure their firms, as well as enter new financial markets. These companies are typically stable and sustainable yet lack the capital to head on major projects and expansion efforts. This equity type is structured as either common or preferred stock (although some instances of hybrid structures have been noted).

2. Venture Capital: Investments towards young and fast growing early-stage, high risk/potential startup companies. Read more about Venture Capital at our past blog.

3. Leveraged Buyout Investing (LBO): The strategy of acquiring the controlling majority of a company’s equity or shares through leveraged (borrowed) financials. Attractive buyout candidates include companies that have potential for new upper management, capital assets like buildings and property used for collateral, and depressed value of stock prices. PE Firms finance LBO with a hybrid structure using syndicated loans that deliver revolving credit and high-yield bonds.

4. Recapitalization: The restructuring of debt and equity without disruption to a company’s balance sheet. Generally used by private companies, this form of refinancing issues bonds that increase money which allows for the buying of stocks or paying of dividends.

5. Mezzanine investing: A type of debt financing that allows the lender claimed rights in a company if their loan is not paid back. Frequently used to finance acquisitions and buyouts, mezzanine financing is operated about 6-12 months before a company goes public so that profits from a public offering will repay the debt. This equity type is structured as either debt or preferred stock.

Preferred stock

Preferred stock

Definition

Preferred stock, also known as preferred shares or preferreds, is a type of equity towards a business that holds priority over common stock in relation to the payment of dividends and liquidation rights. Preferrers typically have no voting rights. It is the most common type of equity for a venture capital to hold and they are rated by major credit rating companies.

Benefits

Holding preferred stock means that stockholders have a higher claim to business earnings when excess cash is distributed in the form of dividends in comparison to common stockholders. Also, should a company liquidate, preferred shareholders are to be paid back first the money they invested before the common stockholders.
In regards to the type of dividends received with preferred stock, they are paid at regular and timed intervals to the shareholders. If a company misses a payment, it is required to pay preferred shareholders before all other payments, namely the common shareholders. Because these payments are set and guaranteed, preferred stock is referred to as a fixed-income security.

Risks

Preferred shares tend to not come with voting rights within company decisions. Also, preferred shares are paid fixed dividend payments which means is a company does very well, preferred shares cannot benefit as much from the profits.

Peer to Peer

Peer to Peer

Definition

Peer-to-peer lending is when an individual loans money to another individual without the use of a middleman, like a bank. By bypassing the intermediary, P2P sites allow for people to invest directly to each other to reap social and financial awards.

America’s leading P2P website [www.prosper.com Prosper Loans Marketplace], states three easy steps on how P2P lending works. First, the borrowers choose a loan amount, purpose, and post their request. Second, that investors review submitted requests and invest in what they like. Lastly, once an investor has chosen a company, borrowers make fixed monthly payments until they repay the loans. As of January 2012, actual return rates for Prosper investors hit 10.69% whereas borrowers dealt with fixed rates from 6.59% to 35.84% APR.
Just like the stock market, there are some risks with P2P investing. Borrowers could potentially default on their loans, and although P2P websites pursue funds through collection agencies, there is still the possibility of losing money.

An attractive feature of P2P lending is with the rates. Rates for borrowers are usually better than traditional bank, lower than 10% – this is especially striking for borrowers unqualified for regular bank loans due to poor credit scores. For lenders, there are often higher returns with P2P in comparison to that received from their savings accounts.

The average loans on a P2P network range from $2,500 to $25,000 and last between 3-5 years. The minimum investment is often $25.

Partner Equity Investment

Partner Equity Investment

Definition

Benefits

By having a partner invest and buy equity in your company, the responsibility of the business’ success is now a shared and joint effort. It is often a concern that bringing in a partner means losing control over the business, especially if your partner provides enough capital to outweigh your share of the company. In some effort to relieve this concern, many companies attempt “sweat equity” trials before fully signing on a partner. With sweat equity, a person will work for your company providing their time and labor, not their money. In return, they receive small portions of equity to the company. By using this method, you can add value to your company with the projects completed as well as test the loyalty and dedication of your potential partner.

Market Capitalization

Market Capitalization

Definition

Market Capitalization (also sometimes abbreviated with Market Cap) is determined by multiplying the total number of outstanding shares by the current price of the stock. This number reflects the total companies worth.

Further Breakdown

These are estimates used when further breaking down companies:

Large Cap – Greater than $5 Billion

Mid Cap – Companies between $1 Billion and $5 Billion

Small Cap – Companies below $1 Billion