MABINI COLLEGES, INC.

Daet, Camarines Norte

COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY

2ND Sem., S.Y.2020-2021

FE 8 – VENTURE CAPITAL
MODULE 1
Title: Nothing Ventured, Nothing Gained: VC Basics

Name of Student:
Course/ year:
Class Schedule:
Date Received:

Module Overview:

Venture Capital is often misunderstood and feels like a big cloaked, black box to many people. In
reality, venture capital is pretty easy to understand after you’ve been given the basics. Further, venture
capitalist are more open about sharing information than people you think. You just need to know where
to look for the information.

In this module, you discover which companies benefit most from venture capital, how venture
capital works, how to connect with VCs and when the time comes, how to pitch to investors. It also
describe the whole start-up funding landscape and explain how to navigate it wisely. This module
introduces you to venture capital and provide the general overview. Consider it your gateway to this
exciting world.

Learning Outcomes
After completing this module, students must have:
 Getting familiar with venture capital and venture capitalist; and
 Seeing the whole venture capital process

LECTURE NOTES
Read this…

Understanding Venture Capital and Venture Capitalist

VENTURE CAPITAL
 is a generic term that refers to equity and equity-linked financing for ventures ranging from
seed and startup ventures to bridge financing for a few superstars preparing to move into the
traditional capital market, typically via a merger, acquisition, or IPO. Diverse investors with
 diverse objectives provide venture capital. Understanding differences among the sources and
objectives of venture investors, and the markets in which they function, raises the odds that an
entrepreneur’s search for capital will be successful. Two classes of investors make up the
venture capital markets-venture capital funds and wealthy individuals, so-called business
angels.
 is a very specific type of investment for a very unique type of company. Venture Capital-
backed companies are expected to grow extremely fast - much faster than other companies.
In addition VC backed companies are sold after five or seven years in an acquisition or on the
stock market in an initial public offering (IPO).

 Technically speaking, venture capital is just like any other investment, an asset class. Venture
capital investment are high risk and also potentially high return. Not all investors want to be
involved with venture capital (sometimes called risk) because of the level of the risk involved.
A VC has five main characteristics:

1. A VC is a financial intermediary, meaning that it takes the investors’ capital and invests it
directly in portfolio companies.
2. A VC invest only in private companies. This means that once the investments are made, the
companies cannot be immediately traded on a public exchange.
3. A VC take active role in monitoring and helping the companies in its portfolio.
4. A VC’s primary goal is to maximize its financial return by exiting investments through a sale
or an initial public offering (IPO).
5. A VC invests to fund the internal growth of companies.

Advantages of Venture Capital

1. Large amount of capital can be raised

2. Help managing risk is provided
3. Monthly payment are not required
4. Personal assets don’t need to be pledge
5. Experienced leadership & advice is available
6. Networking opportunities are provided
7. Collaboration opportunities with industry experts & other startups are available
8. Assistance with hiring & building a team is available
9. Increased publicity & exposure are likely
10. Help raising subsequent rounds of funding is available
Disadvantages of Venture Capital
1. Founder owner is reduced
2. Finding investors can be distracting for founders
3. Funding is relatively scarce & difficult to obtain
4. Overall cost of financing is expensive
5. Formal reporting structure & board of directors are required
6. Extensive due diligence is required
7. Business is expected to scale & grow rapidly
8. Funds are released on a performance schedule
9. Losing the business for founder is possible
10. Leverage in negotiations is rare for start ups
VENTURE CAPITALIST
 the people who invest the money in start-up business
 the kind of companies that are prefect for venture capital
Introducing the venture capitalist
Venture capitalist are professional investors who give start-up companies money in exchange for
equity in the company. They provide both liquid capital and support for a company during a
fundamental time in the growth of the business.

Venture capitalist they are responsible for bringing together large amounts of money for an
investment fund (called raising a fund), which is then used to invest in companies, hand-picked to
become part of the VC’s (or VC firms) portfolio. The VC and his team choose companies that are
capable of growing very large, very fast, earning the VC firm many times its initial investment.

Venture capitalist know that not every company in their portfolio will provide a huge return on
investment and so to tip the hand in their favor, VC’s do two things:
 They invest in companies that have been excellent odds of being successful venture-quality
companies
 They support the companies in their portfolio with resources like mentorship, board
members, and strong management.

Venture capital firms tend to specialize. They focus on a specific stage of company and one or two
industries. A VC firms may focus on companies in the medical device field, for example, or maybe in
clean energy. Because VC’s deal with risky investments, they have to make sure that they understand
their chosen industry and technologies inside and out. Therefore, the company must fit into the firm’s
profile before the firm consider investing.

What do Venture Capitalist do?

1. Investing begins with VCs prospecting for new opportunities and does not end until a
contract has been signed. ( screen, term sheet, due diligence and closing)
2. Once an investment is made, the VC begins working with the company through board
meetings, recruiting, and regular advise. Together, these activities comprise the Monitoring
group.
3. The final group of activities is exiting. As discuss earlier, VCs are financial intermediaries
with a contractual obligation to return capital to their investors. However, the exit process
itself requires knowledge and skills that are somewhat distinct from the earlier investment
and monitoring activities. VCs plans their exit strategies carefully, usually in consolidation
with investment bankers.
Focusing on different stages
Stage 1 VC may invest in seed stage companies (companies with no revenue or little revenue),
Stage 2 companies (those with $5 million to 50 million in revenue)
Stage 3 they may fund mergers and acquisition of larger companies. Companies of different
sizes have very different issues and needs.

Types of Venture Capital Funding

1. Seed capital- if you’re starting out and have no product or organized company yet
2. Startup capital-at this stage, your company would have a sample product available with at
least one principal working full-time
 3. Early stage capital- two to three years into your venture, you’ve gotten your company off the
ground, a management team is in place, and sales are increasing.
4. Expansion capital-your company is well established, and now you are looking to a VC to help
take your business to the next level of growth.
5. Late stage capital-at this stage, your company has achieved impressive sales and revenue and
you have a second level of management in place.
6. Bridge financing-you may also be looking for a partner to help you find a merger or acquisition
opportunity, or attract public financing through a stock offering.

Venture capitalist must be experts in their chosen industries, understanding it completely. This
specialty is especially important because the best portfolio companies have game-changing
technologies that disrupt markets. Predicting the success of companies that don’t have any
contemporaries is a very challenging task!

Most venture capitalist, even those who invest in seed stage companies, look for the following:
 That the company has a product or has made a lot of progress toward a product
 That the company has a strong team that can execute its plan
 That the company has connected with its target customer and understands its market

These factors impact the company’s risk level. Investors have a level of risk that they are willing to
accept in a company. Investors interested in later stage companies want to have removed more of the
risk from the company by processing through necessary milestones. Seeds stage investors are more
accepting of risk and use a high risk profile as a way to get more equity for the same investment
dollars.

Getting familiar with the VC fund lifecycle

Venture capital funds don’t last forever. They tend to run on a predictable, ten-year cycle.

1. Investors spend the first year raising a fund from high-net-worth individuals (accredited
investors), corporations, and institutional investors like pension funds.

2. VCs spend the next few years finding companies to add to their portfolio (called sourcing
deals). During this period, you’ll get introduced to a VC through a mutual contact, or you’ll
submit your pitch deck to the VC through the VC’s website.

3. After the company is given investment and becomes part of the portfolio, the VC proceeds to
manage the company. Generally, the VC do this by joining the board.

4. As the funds near the end of its lifespan, the VC’s work to liquidate the companies through
mergers and acquisitions. If the company does very well, it may go public and become a
company traded on the open stock market. It the company isn’t doing well. It can be shut
down and its assets sold separately.

5. As all the companies in the portfolio are sold, the money is returned to the original investors
(limited partners) who entrusted their cash to the VC, and the VC funds closes. At this point,
you’re free to do whatever you want. Your formal relationship with the VC is over, and you
can start a new company, get a 9-5 job in a corporation, or retire.
Choosing the Venture Capital pathway

Companies that benefits most from VC are those that have a disruptive technology or the
product that aim to grow very large very quickly. Entrepreneurs who benefit most from VC are those
who want to create a great new company and do not need to retain full control over it as it grows.

Companies that have a tried-and-true product or service may not benefit from VC. Venture
Capital also may not be right for the company owner who likes to retain primary control or has always
dreamed of handling the business down through generations.

Looking at alternatives to venture capital

If you decide that mega-high growth, high stress, venture-backed start-up company lifestyle
isn’t what you signed up for, you can grow your company as small-to midsized business (SMB).
Compared to venture capital-backed companies, SMB companies tend to require a lot less capital,
grow more slowly, and remain more stable as they grow.

Small business have lots of different ways to raise money, including through bank loans,
crowdfunding, friends and family, grants and franchising.

From Zero to Venture Capital: Knowing what to Do to secure Venture Capital

The most successful venture capital business are not just good at what they do; they are also
lucky. Because you can’t do anything to improve your serendipity, you can plan your business from
the beginning in ways that remove hurdles and increase the possibility of success.
Follow this suggestions:
 Start by thinking about the end. When you look back on this business from the future, what
do you want it to look like?
 Target a huge problem that has a huge market. VC wants big exits. The best thing that you can
do to set your company up for VC funding is to go after a huge problem with a huge market.
 Get your feet under you. VCs don’t fund companies with grand ideas until the company shows
a lot of progress toward revenue.
 Become visible. You can increase the likelihood of getting funded quite a bit by simply
meeting the funders.
 Develop the deal. Not only do you have to develop the company, but you also have to design
a great investment deal.
 Start pitching. Pitching is such an important and involved task, that we decide an entire part
to it.

Polishing your company for investors

 Show your market research in ways that investors can follow.

 Revise your business plan and business model regularly so they reflect the new information
that you have learned.
 List all the strategic partnerships, mentors, advisers, and other supportive relationships that
you have made
 Plan out employee needs in the near future.
  connectinh

Putting together the deal

Developing your business is only one part of raising capital. You have to develop the deal. The deal is
the amount of money that you need and the percentage of the company that the investor will get in
return for capital under certain conditions. Conditions can include requirements for milestone
achievement, involvement of certain industry experts, or many other things.
The following are some key points:
 Lay out your company’s plans for the future and determine how many times you’ll have to
raise capital to achieve your goals
 Identify risks/milestone: we use the term risk to mean the things that absolutely must go
well; otherwise you cannot achieve your goals. You can communicate the stage of your
company, determine the price of your shares, and prove traction all by thoroughly
understanding the risks you have overcome and the ones you have ahead of you.
 Calculate valuation: After you have grasp of risk, you can determine the valuation of your
company.
 Be prepared to negotiate: To negotiate well, you have to understand what you want out of
your deal.
 Collect due diligence materials: One of the best things you can do to help speed along your
funding timeline is to get all of your business materials in order for due diligence. Doing so
before an investor has shown direct interest may seem premature, but it’s really important.

Making your pitch

In a pitch, you present your company and your deal to investors. These days the standard
ways to get money from VCs is to pitch to them using a PowerPoint presentation and a short
dialog. The general pitch will go something like this:
 You tell investors what you do (software, hardware, device, toy ) and how you’ll make money
 You discuss how much money you can make by describing the people or business who’ll buy
this product.
 You tell your investors how you gain access to your customer by detailing the promotional
plan and the distribution plan.
 You tell investors about the milestones involved in your company’s future development and
reassure them that you are capable of running this company by outlining all the milestone
that you’ve already overcome.
 You give financials and then talk about the investment opportunity.