Mar 13 – Financing and Distribution
Steps – Not everyone uses all these; some don't need any, ignore some, etc.
– Initial funding of the firm – someone has an idea for a product or idea – not
necessarily have the knowledge to raise equity for their business. Often
takes years for a company to become a household name.
– Can't get money from stock market, because there is not business activity
due to the newness of the company.
– Provide much early-stage financing.
– Reasons as to why traditional funding doesn't always work.
2. Types of productive assets – intangible assets – if someone doesn't have real
assets, there is no proof of a good track record.
3. Informational asymmetry problems – eg. borrower knows more than the
lender. Hard to distinguish b/w a good and bad entrepreneur.
– Venture capitalists invest so they can have excellent returns on the loan
they lend to the entrepreneur. Involvement in business – most investors are
quite involved due to the want for large returns.
How Venture Capitalists Reduce Their Risk
– Stage funding: not giving the full loan at once – giving it in stages – the
venture capitalist will analyze the entrepreneur's success so they minimize
– Requiring entrepreneurs to make personal investments: if the entrepreneur
is willing to put up some of their finances, this is a good sign that the
company may have good returns.
– Syndicating investments – diversification allows getting involved in the
business while getting involved in other ventures, gives confirmation that
other venture capitalists are in agreement with you, so this must mean it is
a reasonable investment
The Exit Strategy
– Point where venture capitalist wants to leave: terms about this stated in the
initial document (contract).
1. Selling to private market eg. Large c