MOS 1023 Finance Lecture 2
Function of Financial Manager - Review
-Debt may give a better return if there is more leverage
-Not every company goes through exactly the same cycle
Bootstrapping
-Seed money goes into developing the prototype
-Comes from own money or personal bank loans
-Should only last 1-2 yrs (any longer and idea may be fruitless)
-Lasted 2 yrs for Google before acquiring angel investors
Venture Capital
-Venture capitalist = managers of funds
-Help entrepreneurs take their businesses to the next step
-Entrepreneurs are often lacking in business and management skills (mostly engineers etc.)
-Invest only if they believe the idea has potential
-Traditional sources = bank loans etc.
-Most businesses fail (9/10) and bankers (and most investors) are risk averse (only invest if expected return is
higher than risk)
-No collateral assets. Only patents and ideas (don’t guarantee future cash flow)
-Entrepreneurs have more info than banks and banks have no way of determining whether you are a good or
bad entrepreneur
-Venture capital funding is equity (they become part owner)
-Investors get preferred stock (get payouts before other stockholders)
-Expecting a good return
-Venture capitalist understand the risk (they are experts)
-Fairly high success rate for venture capitalists (pick only ventures they believe in)
-Funding in stages allows check points to regroup and see if things are going properly
-Easier to pull out and lose less money
-Entrepreneur’s investment shows commitment
-Syndication = Portfolio diversification
-Partial out funds to other investments so one investors is not completely on the hook
-Confirms that other investors think it’s a good investment
-Venture capitalists tend to stick around for 3-7 years
-Want in and out with return fairly quickly
-Contracts for exit strategy are put in place involving entrepreneur
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