Question

Michael is an art student at BFCU and will be graduating at the end of the current semester. Michael has a deep passion for artistic works and over the years has collected many valuable pieces of artwork including paintings, lithographs, sculptures and other fine pieces of art. Most of the items in his collection were acquired at estate liquidation sales for very low prices. Michael’s inventory of artwork has grown so much that his parents’ huge basement is packed wall to wall with little room for anything else and he continues to squeeze new stuff in. Michael’s father is the primary supporter for the family and is retired living on a modest fixed income. One morning Michael’s father decided to have a talk with his son about his future after graduation. He told his son that he wouldn’t be able to afford paying for graduate school and inquired about Michael’s efforts at finding a job after graduation. Michael is extremely disappointed because his dream was to continue in college until he had obtained his Master’s degree and then he would begin a career hopefully in the art field. As Michael thinks about his predicament, he begins to consider strategies for raising the funds he will need to go to graduate school. He has discounted the option of getting a government education loan because he doesn’t want to be saddled with a huge debt that he will have to pay off upon graduation as he is also thinking that payments on the loan may be required at the same time that he is ready to settle down and start a family. He suddenly thinks of a brilliant idea to finance his graduate studies. He will liquidate his art collection as well as continue to acquire and sell artwork. He recently had his collection appraised and if he is able to sell his stuff, he will have more than enough to pay for school with a lot left over for other things. Michael reveals his plans to his dad and his dad is cautiously optimistic and throws a “monkey wrench” into Michael’s plans when he tells him that he will require a considerable amount of investment capital to start his business. He justifies his concerns in listing a variety of expenses that Michael will require funds for in starting his business including rent for a storefront, advertising, one or more employees, office equipment and supplies, salaries, insurance and other startup business expenses. Michael doesn’t have the kind of capital that it will take to get his business started taking into account all the expenses listed by his dad that he will need money for. He comes to the conclusion that the only way he can get his business idea off the ground is to attract private investors to raise the venture capital he needs. He begins devising plans to meet and discuss his business idea with prospective investors when you, a longtime friend, walks in and he lays all of his woes in your lap. What will you tell Michael?

Answer 1

As Michael has decided to approcah private investors or venture capitalist due to lack of his own funds to float his business idea. Whenever private firms are in quest of more funds to fund their business ideas as they cannot fund the business as they dont have sufficient capital, these private firms approach to private investors and venture capitalists.

Venture capital is very useful for any private firm as they provide capital at different stages of the growth of private firm. For example seed money is provided by the venture capital to fund the testing of new product or any new concept. In our case I would advise Michael to approach the venture capitalist who can certainly help him and his business expansion. Following are the major 5 steps venture capital helps in private firm expansions.

1. Create private equity investors interest in business: There are number of small business firm who have great ideas but not sufficient capital. To fund these ideas the firms are in quest of private investors or venture capitalists. The firm should make sure that business idea should be strong enough to attract capital from the venture capitalists. Venture capitalists also strives find the backgorund of the owner and his personal interest in the business.In our case Michael has exhibited his own personal interest in continuing the business of art in the future.
2. Perform valuation and future return probalities: Once the private investors are ready to invest capital in the business they perform due diligence and perform valuation including assesments of current and future prospects of the business. Private investors uses different method to compute the future values of the business in which future cash flows are forecated and discounted by the expected rate of return.
3. Deal struture: When the deal is being strutured between investors and private firm, the firm has to decide what percentage of proportion the business is ready to give up in the ownership and the private investors need to determine the extent of share in the return of the investment. As private investors are willing to invest in the business they want good return for their investment.
4. Participate in post deal: Once deal is structured between private business and investors, the investors also helps in day to day management of the business which include providing fresh ideas, human capital and fresh money if required.
5. Final exit: The objective of private investors and venture capitalists are to make huge profit in their investment. Once the private business is doing well and owners are making good profits the private investors and venture capitalist exit their share in the private business make hige returns from the same.