20: Entrepreneurial Finance and Venture CapitalQUESTIONS
Q20-1 List and describe the key financial
differences between entrepreneurial
growth companies (EGCs) and large
publicly traded companies.
Q20-2 How does the financing of EGCs differ
from that of most companies in mature
industries? Under what circumstances can
EGCs obtain debt financing from banks or
other financial institutions?
Q20-3 What is an angel capitalist? How do the
financing techniques used by angels differ
from those employed by professional
venture capitalists?
Q20-4 Distinguish between the basic types of
venture capital funds. Which type has
emerged as the dominant organisational
form? Why?
Q20-5 What are some of the common
characteristics of those entrepreneurial
growth companies that are able to attract
venture capital investment? In which
industries and states is the majority of
venture capital invested?
Q20-6 What is meant by early-stage and later
stage venture capital investment? What
proportions of venture capital have been
allocated between the two in recent years?
Which stage requires a higher expected
return? Why?
Q20-7 What are the responsibilities and typical
payoff for a general partner in a venture
capital limited partnership?Q20-8 Define staged financing. Why is this an
efficient risk-minimising mechanism for
venture capitalists?
Q20-9 List and briefly describe some of the
more popular covenants included in
venture capital investment contracts.
What is their general purpose?
Q20-10 What is the most popular form of
financing (or security type) required by
venture capitalists in return for their
investment? Why is this form of financing
optimal for both the entrepreneur and
the venture capitalist?
Q20-11 List the major differences between
venture capital financing in the United
States and in Western Europe. What
major changes have been occurring
recently in the European venture capital
industry?Q20-12 Why is a vibrant IPO market considered
vital to the success of a nation’s venture
capital industry? What impact did the
collapse of Germany’s Neuer Markt
have on the European venture capital
industry?PROBLEMS
THE ORGANISATION AND OPERATIONS OF VENTURE CAPITAL AND PRIVATE EQUITY COMPANIES
P20-1 An entrepreneur seeks $4 million from a venture capitalist. They agree that the entrepreneur’s
venture is currently worth $12 million and that, when the company goes public in an IPO three
years hence, it will have an expected market capitalisation of $70 million. Given the company’s
stage of development, the VC requires a 40% return on investment. What fraction of the company
will the VC receive in exchange for its $4 million investment?
P20-2 An entrepreneur seeks $10 million from a VC fund. The entrepreneur and fund managers agree
that the entrepreneur’s venture is currently worth $25 million and that the company will likely be
ready to go public in five years. At that time, the company is expected to have net income of
$7.5 million, and comparable companies are expected to be selling at a price/earnings ratio of
- Given the company’s stage of development, the venture capital fund managers require a 50%
compound annual return on their investment. What fraction of the company will the fund receive in
exchange for its $10 million investment?