COURSE TITLE: ENTREPRENEURSHIP

AND MARKETING

Course Code: MS434

Course Instructor: Dr. Abid Ullah

School of Management Sciences
Ghulam Ishaq Khan Institute Of Engineering Sciences and Technology
 CHAPTER 12
INFORMAL RISK CAPITAL, VENTURE
CAPITAL, AND GOING PUBLIC

Objectives:

• 12-1: To explain the basics of venture funding.

• 12-2: To discuss the informal risk-capital market.
• 12-3: To discuss the nature of the venture-capital industry and the venture-capital
decision process.
• 12-4: To explain the aspects and methods for valuing a company.
• 12-5: To explain the process of going public.
 INFORMAL RISK CAPITAL, VENTURE
CAPITAL, AND GOING PUBLIC

FINANCING THE BUSINESS

Early-stage financing
One of the first financings obtained by a company.
• Seed capital
Seed capital is the most difficult financing to obtain from outside funds and is usually a
relatively small amount of capital needed to prove concepts and finance feasibility studies.
• Start-up capital
Start-up financing is involved in developing and selling some initial products to determine
if commercial sales are feasible.
 INFORMAL RISK CAPITAL, VENTURE
CAPITAL, AND GOING PUBLIC

FINANCING THE BUSINESS

Expansion or Development financing

Financing to rapidly expand the business.
Second
Third
Fourth
 INFORMAL RISK CAPITAL, VENTURE
CAPITAL, AND GOING PUBLIC

FINANCING THE BUSINESS

VENTURE CAPITAL
Nature of Venture Capital
Professionally managed pool of equity capital.
Equity pool
Money raised by venture capitalists to invest.
Equity participation
Taking an ownership position.
 INFORMAL RISK CAPITAL, VENTURE
CAPITAL, AND GOING PUBLIC

FINANCING THE BUSINESS

Venture-Capital Process
A venture capitalist expects a company to satisfy three general criteria before he or
she will commit to the venture.
 Strong management team
 Unique Product and/or market opportunity
 Significant capital appreciation
 INFORMAL RISK CAPITAL, VENTURE
CAPITAL, AND GOING PUBLIC

FINANCING THE BUSINESS

Venture-Capital Process
The venture-capital process can be broken down into four primary stages:
 Preliminary screening (Initial evaluation of a deal)
 Agreement on principal terms
 Due diligence (The process of deal evaluation)
 Final approval (A document showing the final terms of the deal)
 INFORMAL RISK CAPITAL, VENTURE
CAPITAL, AND GOING PUBLIC

FINANCING THE BUSINESS

General Valuation Approaches
The nature and history of the business
Comparison of financial data with industry
Book value
Earnings approach
Dividend paying capacity
Intangible Assets
Previous stock sales
Market price of stock
 INFORMAL RISK CAPITAL, VENTURE
CAPITAL, AND GOING PUBLIC

FINANCING THE BUSINESS

Ratio Analysis
Calculations of financial ratios can also be used as an analytical and control
mechanism to test the financial well-being of a new venture.
 INFORMAL RISK CAPITAL, VENTURE
CAPITAL, AND GOING PUBLIC

FINANCING THE BUSINESS

Liquidity Ratios
Current Ratio
This ratio is commonly used to measure the short-term solvency of the venture or its ability
to meet its short-term debts. 2:1is considered favorable.
 INFORMAL RISK CAPITAL, VENTURE
CAPITAL, AND GOING PUBLIC

FINANCING THE BUSINESS

Liquidity Ratios
Acid Test Ratio
This is a more rigorous test of the short-term liquidity of the venture because it eliminates
inventory, which is the least liquid current asset. Usually a 1:1 ratio is considered favorable
in most industries.
 INFORMAL RISK CAPITAL, VENTURE
CAPITAL, AND GOING PUBLIC

FINANCING THE BUSINESS

Activity Ratios
Average Collection Period
This ratio indicates the average number of days it takes to convert accounts receivable into
cash. This ratio helps the entrepreneur gauge the liquidity of accounts receivable or the
ability of the venture to collect from its customers. 20-day payment.
 INFORMAL RISK CAPITAL, VENTURE
CAPITAL, AND GOING PUBLIC

FINANCING THE BUSINESS

Activity Ratios
Inventory Turnover
This ratio measures the efficiency of the venture in managing and selling its inventory.
 INFORMAL RISK CAPITAL, VENTURE
CAPITAL, AND GOING PUBLIC

FINANCING THE BUSINESS

Leverage Ratios
Debt Ratio
Many new ventures will use debt to finance the venture. The debt ratio helps the
entrepreneur to assess the firm’s ability to meet all its obligations (short and long term).
 INFORMAL RISK CAPITAL, VENTURE
CAPITAL, AND GOING PUBLIC

FINANCING THE BUSINESS

Leverage Ratios
Debt to Equity
This ratio assesses the firm’s capital structure. It provides a measure of risk to creditors by
considering the funds invested by creditors (debt) and investors (equity).
 INFORMAL RISK CAPITAL, VENTURE
CAPITAL, AND GOING PUBLIC

FINANCING THE BUSINESS

Profitability Ratios
Net Profit Margin
This ratio represents the venture’s ability to translate sales into profits. You can also use
gross profit instead of net profit to provide another measure of profitability.
 INFORMAL RISK CAPITAL, VENTURE
CAPITAL, AND GOING PUBLIC

FINANCING THE BUSINESS

Profitability Ratios
Return on Investment
The return on investment measures the ability of the venture to manage its total investment
in assets. You can also calculate a return on equity, which substitutes stockholders’ equity
for total assets in the following formula and indicates the of the venture in generating a
return to the stockholders.
Thank You
 REFERENCES

Names: Hisrich, Robert D., author. | Peters, Michael P., author. | Shepherd,
Dean A., author.
Title: Entrepreneurship / Robert D. Hisrich, Michael P. Peters, Dean A.
Shepherd.
Description: Tenth edition. | New York, NY : McGraw-Hill Education, [2017] |