Question

True or False

In 2017, venture capital dollars were concentrated in the following three industries: internet, health care, and business products and services.

Of the eight factors usually considered when valuing the venture, provide four of them along with a sentence of explanation for each factor you provide.

Describe and compare early-stage financing to expansion or development financing. Who are the usual investors in each of the two stages

Identify and briefly describe, in order, each of the four major stages of the venture capital process.

Identify the main advantages and disadvantages of going public.

Answer 1

1) Of the eight factors usually considered when valuing the venture, provide four of them along with a sentence of explanation for each factor you provide?

· Management’s ability: VC invests money on management’s business plan and their ability to execute the plan successfully. As management of the startup is ultimately the one going to convert VC’s investment into profitable returns.

· Innovative Idea: VC are interested in investing in startups which address some problem that hasn’t been solved before by any other market players. VC’s only invest if they are able to clearly predict stagnant demand for the product or service as that is bought in the market as a solution to a preexisting problem.

· Size of the market: VC’s analyze the size of the market for product and service that has been offered by the startup. Size of the market usually comprehends demand forecast, CAGR rate of the industry the product/service is into, factors responsible for growth of the industry, current revenues earned by the industry worldwide, geographical market the startup is operating into etc.

· Assessing risk of client conversion: VC’s want to know what the different customer segments are and how startup plans to reach them. They also want to see that whether customers will be attracted towards the product as need of the product is being felt by the customers or need will be induced in the customers through attractive promotion strategies, in other words push or pull strategy (read more about it).

2) Describe and compare early-stage financing to expansion or development financing?

Different rounds of funding are stepping stones in the process of converting an idea into a successful business model. For a startup there are four stages of funding seed funding, early stage, development stage and IPO.

Early Stage financing:

· Early stage funding includes money provided to help an entrepreneur start a business on the ground level.

· Early stage comprises of generally 1,2 or sometimes 3 rounds of financing depending on how much capital intensive industry startup is operating into.

· Early stage funding are highly risky as the product or service is into the incubation/development stage.

· There are no reasonable sales numbers and growth rate to rely on during early stage of financing for a VC investor.

Expansion stage financing:

· As the name itself explains expansion stage includes money to establish and boost manufacturing and sales or establish a business model if they don’t have one yet.

· This stage comprises of not more than 2 rounds of financing.

· At this stage startups have a commercially viable product, therefore; they are less risky as compared to early stage.

· There are sales numbers and growth rate to rely on during this stage of financing for a VC investor.

3) Who are the usual investors in each of the two stages?

In early stage usual investors are Family, friends, angel investors, crowdfunding, or the founder itself. While, in development stage investors are VC firms.

4) Identify and briefly describe, in order, each of the four major stages of the venture capital process?[1]

· Seed funding and Startup stage: Seed funding is the stage when the idea is under incubation and the funds are used for the initial market research as well as team set up. It is highly risky as there are no returns identified at this stage. At this stage funds are raised to use them for developing sample product and test the feasibility or initial market performance of the product. Certain activities include setting initial small scale operations as well as developing the business model.

· Early stage: At this stage startups have figured out the initial improvisation needed in the product and also the initial launching cost of the product which includes marketing costs majorly. It is this stage where actually startups begin selling the product/service.

· Expansion/ development stage: it is the stage where the company has commercially viable product ready and there are some sales numbers to rely on for the investor. Funds are raised at this stage to establish the distribution channel or escalate the sales operations for capturing the potential customer segments.

· IPO/Exit stage: It is the stage where startups have successful operating history and developed marketing channels. It is looking for more funds to escalate the expansion of its product nationally or internationally OR to sell/ merge the startup to interested investors at high net worth value. As VC invest in startup for specified time frame they are looking for a profitable exit from the startup by selling their stake at higher multiple let’s say 10x of their investment till now. Thus, at this stage companies seek money from public through IPO.

5) Identify the main advantages and disadvantages of going public?[2]

Advantages of Public companies:

· Access to more capital through public funding.

· Increased visibility of the company in the market.

· Expanding customer base wider.

· Increased scale of operations like sales and marketing.

Disadvantages of going public:

· Loss of autonomy in decision making in other words founders lose control over decision making.

· Increased legal procedures including the publishing of audited financial statements, quarterly reports on timely basis to public.

· Increased pressure to maintain the steady growth rate as the scale of operations increases the fixed cost obligations also increase.

[1] Reference: “The Five Stages of VC Funding Explained

by Murray Goldstein” https://www.coxblue.com/vc-funding-stages-explained/

[2] Reference: “Advantages and Disadvantages of Going Public” https://www.profitableventure.com/advantages-going-public/