Course Objective

Able to understand Risks in start ups How non-financial

information is useful in valuing a firm

What is venture capital?

Venture capital is equity financing to high risk young companies (sometimes also a combination of other financing instruments)

Venture capitalists are, before everything else, after extremely high returns on investments (30-60% per annum depending on the risk)

High expected return of VCs makes it very expensive financing method for entrepreneurs

Risk is considered higher the earlier the development phase of the venture is

Start up risk

1.

Money risk

1. Burn rate2. Path to profitability (P2P)3. Scalability and its costs4. Exit strategy and market

conditions5. Characteristic of VC fund6. Capital structure and legal

firm structure

1.1. Burn rate

The rate at which a new company uses up its venture capital to finance overhead before generating positive cash flow from operations. In other words, it's a measure of negative cash flow.

Burn rate is usually quoted in terms of cash spent per month

For example: A burn rate of 1 million would mean the

company is spending 1 million per month. When the burn rate begins to exceed forecasts, or revenue fails to meet expectations, the usual recourse is to reduce the burn rate (which, in most companies, means reducing staff).

1.2. Path to profitability

1.3. Scalability and its costs

1.4. Exit strategy andmarket conditions

1.5. Characteristic ofVC fund

1.6. Capital structure and legal form

2. People risk

People risks

2.1. Founder andthe management team

2.2. Buildingboard of directors

2.3. Strategic alliances

Act as value lever leverage Key success factors: information - Added sales channels - Industry buzz - Instant credibility - Access to expertise - Attractive financing opportunities - Merger partners and potential acquirers - Complementary technology

3. Technology risk

Technology risk

3.1. Product development

3.2. Market acceptanceissues

What’s technology trend you’re riding?

How do you differentiate your product or service from competition?

Does your product/service require buyers to change their internal process or culture?

What are your horizontal and vertical plan?

Is there industry awareness of your products/services?

What’s likely quantitative benefit of your product/service?

3.3. Technology proprietary

4. Market risk

Market risk

4.1. Market analysis

The goal is to determine the attractiveness of a market and to stand its evolving opportunities and threats as they relate to the strengths and weaknesses of the firm

Dimension of market analysis :Market size, market growth rate, market profitability, industry cost structure, distribution channel, market trends and key success factors

4.1. Market analysis: question to ask

What is the stage of your industry’s life cycle? What is its outlook? What new and competing technologies are being introduced to your market?How do they compare with yours?What are barriers to entry in your market?

Search Wall Street Journal, Forbes, Fortune and Business Week, www.esa.doc.gov, www.fedstats.com, InDag, BPS, etc.

4.2. Competition

Be sure to know the competitors; the capability, size and market share

Don’t tell VC there is no competition To tackle competition:

Business differentiation and business improvement, present it in business plan in details, finding out competitors’ value to determine own business

Valuation of competitors = adjusted value of our company

4.2. Competition:question to ask

How large are they? Are they publicly or privately held? Where are they in life cycle? Young, developing, or mature business? How quickly are they growing? How profitable are they? Are they first-movers? What is their market share and how quickly is it growing? What key relationships do they have with vendors or customersWhat is their installed base? What segments of the market are they in?

What territories do they operate in? What distribution channels do they use? How are they financed? What is their management team like? What patents, trade secrets or other competitive advantage do they possess? What strategic alliances do they have? What are their strengths and weakness

US Guide: Dun’s Million Dollar Directory; Hoover’s Guide to Private Companies; and Moody’s Industrial Manual

4.3. Customers

4.4. Sales and marketing strategy