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Consider the essence of venture capital
Describe the contents of required documents
Compare different possible investments
Analyze how and when (stages) venture capitalists or business angels invest
All companies need staff specialized in the various functions of a business – production, marketing, finance, accounting, human resources, R & D, etc. they also need both ideas and the capital necessary to turn them into goods or services, but ideas and capital are particularly important for new companies (start-ups). This unit is about entrepreneurs and the companies that raise finance for them.
Read the text and do the tasks that follow
Venture Capital and Venture Capital Firms
Venture Capital (VC) ("risk capital" or ‘unsecured risk financing’ or ‘development capital’) is the money and resources made available to startup firms and small businesses with exceptional growth potential. Venture capital funds pool investors' cash and loan it to startup firms and small businesses with perceived, long-term growth potential. It typically entails high risk (and potentially high returns) for the investor and the cash infusion often comes at a high price.
Most venture capital comes from groups of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. Venture firms often take large equity positions in exchange for funding. This form of raising capital is popular among new companies, or ventures, with a limited operating history that cannot raise capital though a debt issue or equity offering. Often, venture firms will also provide start-ups with managerial or technical expertise.
It is typical for venture capital investors to identify and back unquoted companies in high technology industries such as biotechnology and IT. Venture capital assumes four types of risks, these are:
Venture Capitalist is a wealthy investor who provides capital (more than $ 1 million) to start up ventures or supports small companies that wish to expand expecting higher returns for the additional risks taken.
Venture capital firms typically comprise small teams with technology backgrounds (scientists, researchers) or those with business training or deep industry experience. Just as management teams compete for finance, so do venture capital firms. They raise their funds from several sources. To obtain their funds, venture capital firms have to demonstrate a good track record and the prospect of producing returns greater than can be achieved through fixed interest or quoted equity investments. Most venture capital firms raise their funds for investment from external sources, mainly institutional investors, such as pension funds and insurance companies.
Many funds raised from external sources are structured as Limited Partnerships and usually have a fixed life of 10 years. Within this period the funds invest the money committed to them and by the end of the 10 years they will have had to return the investors' original money, plus any additional returns made. This generally requires the investments to be sold, or to be in the form of quoted shares, before the end of the fund.
Venture Capital Trusts (VCT's) are quoted vehicles that aim to encourage investment in smaller unlisted (unquoted and AIM quoted companies) UK companies by offering private investors tax incentives in return for a five-year investment commitment.
The investment process, from reviewing the business plan to actually investing in a proposition, typically takes a venture capitalist between 3 and 6 months. To support an initial positive assessment of your business proposition, the venture capitalist will want to assess the technical and financial feasibility in detail. They will assess and review management information systems; forecasting techniques and accuracy of past forecasting of the company; the latest available management accounts, including the company's cash/debtor positions; bank facilities and leasing agreements; pensions funding; employee contracts, etc. Venture capital firms will judge you by how prepared you are.
If you are starting a business, you have to get capital from investors. In order to persuade them to invest, you need to prepare several critical documents:
Business Executive Summary. It is a brief statement covering the main points that includes a discussion of management, profits, strategic position, and exit plan.
Business Plan. A detailed document that outlines what you are going to do and how you are going to do it; the management team (including full resumes; business strategy); marketing plan (sales projections, distribution, market, and competition; financials) and a competitive analysis.
Due Diligence. The due diligence review aims to support or contradict the venture capital firm's own initial impressions of the business plan formed during the initial stage.
Marketing Material. Any document that directly or indirectly relates to the sales of your product or service.
Ex. 1. Complete the table by inserting the missing forms if possible
Ex.2. Complete the parts of the expressions and make up sentences with them
1. to interest
2. to invest
3. to qualify
4. to be
5. to be committed
6. to be invested
7. to provide incentives
in exchange for
in return for
an equity stake
Ex. 3. Match the words and expressions with similar meaning from column A with column B
1. risk capital a. unquoted company
2. shares (n) b. estimate (v)
3. substantial (adj) c. support/help (v)
4. assess (v) d. considerable/sizeable (adj)
5. deal e. venture capital /development capital
6. unlisted company f. transaction / bargain
7. incentive (n) g. equity (n)
(v) h. stimulus (n)
Ex. 4. Match the Russian word combinations with their English equivalents:
1) cash flow a. “бизнес-ангел”
2) unquoted company b. акционерный капитал
3) due diligence c. налоговые льготы/ стимулирование капиталовложения, послабление налогообложения
4) Venture Capital Trust (VCT) d. проверка благонадежности финансового состоянии компании
5) rate of return e. поток денежных средств
6) business angel f. инвестиционные обязательства
7) investment commitments g. послужной список, достижения
8) equity stake h. контрольный пакет акций
9) tax incentives i. венчурный фонд
10) track record j. уровень доходности
11) share capital k. не котирующаяся компания (ценные бумаги которой не котируются на бирже)
Ex. 1. Based on your understanding of the text, are the following True or False?
Ex.2. Find in the text the answers to the following questions:
When Your Business Needs Money: Angel Investors vs Venture Capitalists
The myth is that venture capitalists invest in good people and good ideas. The reality is that they invest in good industries. Harvard Business Review
There are various options of funding available for those who wish to start their new businesses. If your business needs capital, but your personal resources are tapped out, don't despair - you can put your faith in angel investors or venture capitalists.
Part A. Angel investors
Angel investors (or business angels) are most often individuals (friends, relatives or entrepreneurs) who want to help other entrepreneurs get their businesses off the ground - and earn a high return on their investment. They provide a one-time injection of seed money or ongoing support (between $150,000 to $1.5 million) to the person, using their own personal funds for the investment rather than the viability of the business to carry small startup companies.
An angel investor’s capital in a new business is considered to be a high-risk investment since the new company has not yet established a solid track record of success. Since they often provide the initial funding for a new company, it can be quite difficult to determine if their invested enterprise will be successful in the long run.
There are some distinct advantages of business angels.
- Business angles are characterized by flexible business agreements. Because they are investing their own money, their business deals can often be negotiable. Because of this flexibility, they are more likely to be excellent sources of capital for early-stage businesses.
- Angels can bring forth vast knowledge and experience to a new company. Many angel investors can offer desired support, expertise, and contacts in making a business grow.
- Angels do not require high monthly fees.
- Business angels are characterized by their community involvement. Many angel investors choose to invest locally, which creates employment opportunities and helps stimulate economic growth by encouraging consumers to purchase their products. Many angel investors take pride in using their expertise in giving back to their community.
- Angels are located everywhere, practically all industries. They invest in nearly all markets worldwide. Angel investor is attracted by the potential for a company’s profitability and growth.
Part B. Venture capitalists
Venture capitalist is an investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to public funding. They typically pool money from different sources, generally invest in later-stage companies that have already established stability and success. Venture capitalists are willing to invest in such companies because they can earn a massive return on their investments if these companies are a success. They look for a strong management team, a large potential market and a unique product or service with a strong competitive advantage.
Venture capitalists can provide the basic capital for a new business in return for:
1. Capital in exchange for equity shares. Typically, the venture capitalist takes no more than 15-30 percent equity in their invested company.
2. Stock options. Common stocks represent a unit of ownership in which the holder has voting rights in company decisions, while preferred stockholders do not carry corporate voting privileges. With stock options, the investor would hold a seat on the board and have the power to postpone the dividend payments he would receive from his stock.
3. Assistance of associates. Venture capitalist may need to have one or two of his associates help out with regular company operations. He will make sure his invested company is performing at its optimal state.
Part C. Drawbacks of investors
However, both business angels and venture capitalists cannot be considered an ideal means of funding. They also have drawbacks for the entrepreneur.
1. Can actually be deceptive. While the majority of angel investors truly look beyond the promise of monetary return, there are a few angel investors who are greedy and motivated by money rather than in promoting the good of the firm. They are less patient with new entrepreneurs and do not provide any mentoring or guidance during a company’s early stage of development.
2. Can be costly. In exchange for providing the needed startup capital for a new company, many venture capitalists often require a certain percentage of stake in a company, starting at 10-15% or more, and expect a large ROI for their exit. From their perspective, this is a reasonable exchange since they are investing in very young and risky businesses.
3. Active company involvement can lead to problems. It is not uncommon for an angel investor to have a certain amount of control in running a company. The entrepreneur may unwillingly be forced to give up some degree of control in order to meet their angel investor’s requirements, which can often lead to resentment on the part of the entrepreneur.
4. Lack of industry experience. This limited knowledge adds very little value to a company’s success. That is why entrepreneurs should only seek angel investors with proven experience in their industry.
4. Rarely make follow-on investments. Angel investors are less likely to make follow-on investments because of the risk associated with losing money when reinvesting in an unsuccessful company. On the other hand, venture capitalists have a different approach to follow-on investing. They tend to spend approximately 2/3 of their funds on follow-on investments, taking the opportunity to allow companies to expand while diversifying their current portfolio firms.
5. Do not have national recognition. While there are well-documented directories of venture capital firms available, there is no national register for angel investors. Due to these differences, angel investors do not have the national recognition as their VC counterparts. They remain hidden and mysterious but choose to do so in order to have a degree of separation from entrepreneurs, who may pester them with their business plans and telephone calls.
Ex. 1. Match the Russian word combinations with their English equivalents.
Ex.2. Choose the correct option:
1. Which statement is true?
a.. Angel investors provide capital for established companies.
b. Angel investors provide capital for companies that have succeeded and need to grow their market share.
c. Angel investors provide capital for companies that are in their early stages of development.
2. What is a typical investment for an Angel?
a. $25,000 b. $2 million c. $100
3. What will Angel investors sometimes do?
a. Invest in companies that haven't been founded. b. Invest in companies that are going out of business. c. Invest in companies that have established a large market share.
4. Do angels expect all their investments to succeed?
a. Yes b. No c. Doesn't say
5. Why are angel investors willing to take such high risk?
a. If a start-up succeeds it can deliver up to twice the investment amount.
b. If a start-up succeeds it can deliver up to twenty times the investment amount.
c. If a start-up succeeds it can return the initial investment amount.
6. 'Seeding a company' means:
a. to provide initial investment b. to provide late stage investment
c. to save a company from going bankrupt
7. In a best case scenario, how much might an angel make on a successful start-up investment of $50,000.
a. $80,000 b. $2 Milllion c. $150,000
8. Which example is given of a 'garage' start-up?
a. Google b. Microsoft c. Apple
9. Venture capitalists are:
a. the same as angel investors. b. different types of investors than angel investors. c. people who create start-ups.
10. Venture capitalists help a company to:
a. capture market share. b. begin a company. c. go into bankruptcy.
Ex. 3. Speak on the following issues:
Ex. 4 If you are to start up a new business how VC firms and Angel Investors will score your idea in each of the following critical areas: