33:390:400 Lecture Notes - Lecture 6: Initial Public Offering, Bridge Loan, Underwriting
11 May 2018
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Chapter 20: Raising Capital
20.1 Early Stage Financing and Venture Capital
Start-ups need capital to help fund and create their products
- Usually need other people’s money
- Angel Investors: Informal investors (ex: parents) who invest their own money
- Venture Capital (VC): A private equity market
- $ can come from wealthy families, corp., VC subsidiaries, etc.
Characteristics of Venture Capitalists:
- Financial intermediaries that raise funds from outside investors
- Organized as a limited partnership
- One general partner who invests other people’s money
- Play an active role in monitoring the companies in which they invest
- VC’s generally do not own the investment forever; usually looking for an exit strategy
Stages of VC financing:
1. Seed-money stage:
- A small amount of financing needed to prove a concept or develop a product
- No marketing
2. Start-up stage:
- Financing for firms that started w/in the past year.
- Funds likely to pay for marketing and R&D
3. First-round financing:
- Additional money to begin sales & manufacturing after a firm spent its start-up
funds
4. Second-round financing:
- Funds earmarked for working capital for a firm that is currently selling its
product but still losing money
5. Third-round financing (Mezzanine Financing):
- Financing for a company that is at least breaking even and is contemplating
expansion
6. Fourth-round financing (Bridge financing):
- Money provided for firms that are likely to go public within half a year
Most VC-backed projects never make it past the early stages
VC finance in stages so they have the:
- Option to abandon project, option to expand, so management works hard
find more resources at oneclass.com
find more resources at oneclass.com
Issues in structuring VC deals:
- Difficult for entrepreneur and VC to agree on relevant numbers
- Deal needs to be structured to motivate entrepreneurs
Successful ventures eventually go public because:
- Firm needs more capital than a VC can provide
- Public shares are more liquid, therefore investors demand a lower return
- Entrepreneur and VC want to realize their gains
20.2 The Public Issue
Steps for issuing securities:
1. Need approval to go public from the Board of Directors
2. File a registration statement with the SEC
3. SEC looks at form during the waiting period.
- Firm may distribute copies of a preliminary prospectus → “Red Herring”
- Prospectus: Formal summary that provides information on an issue of securities
4. On effective date of the registration statement, a price is made for the shares → selling starts
5. Tombstone advertising to sell shares during and after the waiting period
Initial Public Offering (IPO): Selling stock to the public for the first time
- Also known as an Unseasoned Equity Offering
Two types of public issues:
- General Cash offer: All new shares are offered to any and all interested investors
- Rights offer: Shares first offered to existing shareholders
For general cash offers, investment banks are usually involved
IB’s are financial intermediaries that perform a wide variety of services
Underwriter: (IB) Firm that buys an issue of securities from a company & resells it to the public
IB’s are helpful because they:
- Formulate the method used to issue the securities
- Pricing the new securities (extremely difficult)
- Selling the new securities
- They have better info and better ability to choose fair price than anyone else
- If IB issues @ a price too high → Buyers won’t buy from them in the future
- If IB issues @ a price too low → Issuers won’t use them in the future
- Must maintain a strong reputation
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Angel investors: informal investors (ex: parents) who invest their own money. Venture capital (vc): a private equity market. $ can come from wealthy families, corp. , vc subsidiaries, etc. Financial intermediaries that raise funds from outside investors. One general partner who invests other people"s money. Play an active role in monitoring the companies in which they invest. Vc"s generally do not own the investment forever; usually looking for an exit strategy. A small amount of financing needed to prove a concept or develop a product. Financing for firms that started w/in the past year. Funds likely to pay for marketing and r&d: seed-money stage: Start-ups need capital to help fund and create their products. Most vc-backed projects never make it past the early stages. Vc finance in stages so they have the: third-round financing (mezzanine financing), fourth-round financing (bridge financing), second-round financing, first-round financing, start-up stage: Additional money to begin sales & manufacturing after a firm spent its start-up funds.
