Management and Organizational Studies 1023A/B Lecture Notes - Venture Capital Financing, Venture Capital, Private Equity Firm

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Nov 7, 2012 / Wednesday
Bootstrapping is the process by which many entrepreneurs raise “seed” money and obtain other
resources that are necessary to start their business. As in short terms, it is the initial funding of the firm.
Most of the time, initial “seed” money comes from the entrepreneur or other founders.
An individual is said to be boot strapping when he or she tries to found and build a company from
personal finances or from the operating revenues of the new company.
Venture capital is the money provided by investors to startup firms and small businesses with realized
long-term growth potential.
“Venture capitalists” or “angel investors” are individuals or firms that help new businesses get started
and provide much of their early-stage financing. These individuals are, most of the time, wealthy
businessmen and they invest their own money in emerging businesses.
Venture capital is considered a very significant source of funding for startups that do not have access to
capital markets.
There are also three things to keep in mind about the disadvantages of venture capital;
Firstly, venture capital typically entails high risk for the investor. Hence, they are typically more
sophisticated and may drive a harder bargain.
Due to this risk, secondly, venture capitalists are more likely to influence the strategic direction of the
company.
Thirdly, venture capitalists are more likely to be interested in taking control of the company if the
management is unable to drive the business. This actually means that the actual owner of the company
loses complete control somehow.
Venture capitalists’ investments give them an equity interest (proportion of ownership) in the company,
Often in the form of preferred stock that is also convertible into common stock at the inclination of the
venture capitalist.
Preferred stock is a class of ownership in a corporation that has a higher claim on the assets and earnings
than common stock. Preferred stock generally has a dividend that must be paid out before dividends of
the common stockholders and the shares usually don’t have voting rights.
Security is a financial instrument that represents an ownership position in a publicly-traded corporation,
a creditor relationship with governmental body or a corporation, or rights to ownership as represented by
an option. Negotiable financial instrument that represents a financial value.
Common stock is a security that represents ownership in a corporation. These stockholders exercise
control by electing a board of directors and voting on corporate policy. These types of stockholders are
on the bottom priority ladder for ownership structure.
Additionally, venture capitalists provide more than just financing. However, the extent of the venture
capitalists’ involvement depends on the experience of the management team.
Advice can be said to carrying one of the most important roles of venture capitalists.
Advice from these people is important because they know the general knowledge regarding what it takes
for a business to succeed. Therefore, they also provide counseling for entrepreneurs from when a
business is just started to early stages of operation and so forth.
Venture capitalists are not “foolish” with their money. They actually know that only a few companies
will survive to become successful. So, they have tactics to reduce their risk of investment;
Funding the ventures (money) in stages,
Requiring entrepreneurs to make personal investments,
Syndicating investments,
Maintaining in-depth knowledge regarding the industry in which they specialize.
Syndication occurs when originating venture capitalists sells a percentage of a deal to other venture
capitalists. It reduces risk in two ways;
It increases the diversification of the originating venture capitalist’s investment portfolio,
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Document Summary

Nov 7, 2012 / wednesday: bootstrapping is the process by which many entrepreneurs raise seed money and obtain other resources that are necessary to start their business. Negotiable financial instrument that represents a financial value: common stock is a security that represents ownership in a corporation. These stockholders exercise control by electing a board of directors and voting on corporate policy. These types of stockholders are on the bottom priority ladder for ownership structure: additionally, venture capitalists provide more than just financing. Therefore, they also provide counseling for entrepreneurs from when a business is just started to early stages of operation and so forth: venture capitalists are not foolish with their money. They actually know that only a few companies will survive to become successful. Initial public offering (ipo) is the first sale of stock by a private company to the public.

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