风险投资与公共政策chapter3

Downside risk management
• Information disclosure
– VC firm has timely access to important information about the portfolio company
• regular key performance indicators • Extraordinary events that may impact its investment.
Chapter 3
Venture Capital Investing Model
Why entrepreneurs need VC?
• Factors may limit access to capital
– Uncertainty – asymmetric information – the nature of firm assets
• Syndication is where several venture capital firms participate in the deal
– each putting in part of the total equity package for proportionate amounts of equity – usually with one venture capital firm acting as lead investor.
• E.g. entrepreneurs, senior executives, scientists, engineers, thought-leaders, head-hunters and academics.
– VCs to focus their efforts on this kind of proprietary deal-flow, reducing the risk in an investment opportunity
• Veto rights
– negative control (the ability to prevent the company from doing something)
Extreme caution
• Staged investment
– Investments are staged, with incremental funding based on meeting milestones. – For example, a venture capitalist might provide enough funds to build a prototype of a product.
Extreme caution
• Focus on proprietary deal flow
– VCs spend a lot of their time developing a proprietary network, composed principally of people deep within the industry sector that the VC firm focuses on
Why entrepreneurs need VC?
• Asymmetric information
– An entrepreneur knows more about the company. – the entrepreneur may take detrimental actions that investors cannot observe
• undertaking a riskier strategy than initially suggested • not working as hard as the investor expects.
– selection problems
• Investors cannot distinguish between competent entrepreneurs and incompetent ones. • Unable to screen out unacceptable projects and entrepreneurs, investors cannot make decisions about where to invest.
• If the prototype works as expected and other milestones are met, the venture capitalist will fund the next phase such as a pilot plant or market tests.
Why entrepreneurs need VC?
• Nature of the assets.
– Firms that have tangible assets for example, machines, buildings, land, or physical inventory may find financing easier to obtain. – When the most important assets are intangible, such as trade secrets, raising outside financing from traditional sources may be more challenging.
Extreme caution
• Due diligence
– the process of investigating all aspects of the investment opportunity. – a deep evaluation of
• • • • • • the management team the core technology the marketplace dynamics actual and potential competitor the business model traditional financial and legal due diligence
Exit Obsession
• In the investment process a VC will obsess about the nature and timing of a likely exit at a value that will meet or exceed the firm’s minimum investment performance criteria. • The VC will therefore focus on the ability of the business model to find
– have full upside participation (take full advantage of successful investments) – retain the ability to continue to advance capital into those successful investments (to be able to allocate their fund capital dynamically towards the successful investments).
Downside risk management
• Tranching of investments
– enables the VC to step back from an investment at regular intervals should its development not meet expectations – without limiting the VC’s ability to continue to participate should the business exceed expectations.
Extreme caution
• Early exclusivity
– VC often requires exclusivity to be granted to them early on in the process, – VCs can take their time properly to evaluate an investment opportunity
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Extreme caution
• Syndication
– When the amount of funding is very large, or when the investment is of relatively high risk, the venture capital firm may consider syndicating the deal.
– likely buyers for the business three to five years out – the potential for the company to go public
High reward for high risk
• It is highly unlikely that an early stage VC will invest in a business which is unable to generate a return on investment of less than 10× within 5-7 years. • It is vital for a VC firm to
Five core philosophies of VC investment
• (1) extreme caution over the act of investment; • (2) obsession with exit potential; • (3) an insistence on an uncapped “upside” potential; • (4) equal insistence on “downside” risk management; • (5) the constant theme of dynamic capital allocation.
Why entrepreneurs need VC?
• Uncertainty
– a measure of the array of potential outcomes for a company or project. – The wider the dispersion of potential outcomes, the greater the uncertainty. – Young and restructuring companies are associated with significant levels of uncertainty. – High uncertainty means that investors cannot confidently predict what the company will look like in the future.
Downside risk management
• Price protection
– If there is a subsequent capital-raising exercise by the company at a lower price, then VC’s shares acquired earlier should be “re-priced” to the same lower value. – This is known as “anti-dilution protection”.