Venture capital

Text 3

Read the text and be ready to speak about the stages of venture capital investing using the words underlined in the text. Introduce the material by means of a mind map.

Understanding the Venture Capital Stages

Successful venture capital funding is a process of reducing perceived risk to the lowest possible level. The funding source has fiduciary responsibility to its investors (business angels and venture capitalists). The requirements of funds vary with the life cycle stage of the enterprise and terms of investing. Many VC firms are very strict about providing money to potentially big businesses.  Others are only in the market to fund companies preparing to go public with an IPO. Let’s look at the stages of venture capital financing properly.  

1. Early stage

An early stage company is one that is not yet ready to position its product or service on the market.  A company in this stage may need seed capital or start-up capital in amounts ranging from $25,000 to $250,000. This stage of financing is fraught with extremely high risk. The new technology and innovations being attempted have equal chance of success and failure. The capital is usually provided by business angels and is characterized by the following sub stages:

• Seed Capital. The business is still in the idea stage. Seed-stage financings are often comparatively modest amounts of capital provided to inventors or entrepreneurs to finance the early development of a new product or service. Cash infusions are directed toward feasibility studies, R&D, product development and testing, market research, building a management team and developing a business plan.
• Start-up Capital. Companies are able to begin operations but are not yet at the stage of commercial manufacturing and sales. Investors support product development and initial marketing push of the companies which have been recently organized to distribute your product in the market. Generally, such firms have already assembled key management, prepared a business plan and made market studies. At this stage, the business is seeing its first revenues but has yet to show a profit. This is often where the enterprise brings in its first "outside" investors. The risk tends to be lower relative to seed capital situation.

2. Expansion

Expansion capital is for businesses already in or ready to start production today.  The amounts that venture capitalists usually invest in expansion companies range from $500,000 to $5 million.  There are usually four stages to expansion capital:

• First stage capital is provided to companies that have completed the product development stage and require further funds to initiate commercial manufacturing and sales but may not be generating profits. Most first-stage companies have a product or service in testing or pilot production. The time horizon to realization is up to 6 years. 
• Second stage. The funds are usually provided for companies in production and generating revenue, but not yet making a profit. Second stage capital helps to grow receivables, inventory, payables, physical plant expansion, product improvement and marketing. But the company may not yet be profitable.
• Third stage / Mezzanine financing.  The capital at this stage helps businesses perform major expansion and perhaps even develop and introduce new products or renew advertising efforts. It is characterized by a developed product on the market, a full management team in place, sales revenue are generated from one or more products, but the surplus generated is insufficient to meet the firm’s needs. The company is near break-even.
• Fourth stage / Bridge financing. The business expands high yields, capital growth and good profitability. It has reputed market position and an established formal organization structure.  Companies in this stage are in need of capital to help smooth the way to a potential IPO. It is repaid with proceeds of the IPO, and used to restructure previous equity positions. The company demonstrates significant revenue growth.

3. Acquisition/Buyout

It is favored by venture capitalist as it offers higher rewards in shorter period with lower risk. Funds are needed for new or larger factories and warehouses, production capacities, developing improved or new products, developing new markets or entering exports by enterprise with established business that has already achieved break even and has started making profits.

A company in this stage has advanced operations and is prepared to acquire another competing company as a subsidiary, or expand into new markets and products with the purchase of an existing company.  To make acquisition happen, high interest "Junk Bonds" may be used, or substantial debt from banks. Monies for this type of capital can range from $3 million up to $20 million. Sometimes investors apply to Leveraged Buyout (LBO) when funds are provided to enable a management group to acquire a product line or business from a public or private company. Revitalized management may have as little as 1% of their own money invested.

Ex.1. Comment on the following scheme:

WRITING

Analyze the table below and write an essay under the heading “Venture capital firms vs Business Angels. Pros and cons”. Follow the structure of a good essay: introduction, the main body (3-4 paragraphs) and the conclusion. Use the topic sentence to introduce the subject of each paragraph; write well-developed paragraphs, giving reasons/examples; use sequencing (e. g. Firstly, Secondly, etc) and linking words (e. g. however, although); make references to other sources and use quotations. Make use of the linking words that follow:

 

To add more points to the same topic	In addition (to this), furthermore, moreover, besides, apart from, what is more, as well as, not to mention (the fact) that, also, not only ..., but, also/as well, both … and, There is another side to the issue/question/argument of…
To express cause	Since/because, in view of/because of/owing to/due to (the fact that)…, the reason that…
To express effect	Thus/therefore/so/consequently, the result of … would be,/this would result in…
To express purpose	So as/in order (not) to…, with the purpose of/intention of (+ing)

Angel investors vs Venture Capitalists

Differences	Angel Investors	Venture Capitalists
Experience	invest five years or more; have entrepreneurial experience; provide “hands-on” guidance to early-stage companies.	have a decade or more experience;  provide their own associate staffing to ensure their investment.
Money source	private investor- uses his own personal money to fund their investments.	professional money manager- they pool capital from other sources, such as pension funds and university endowments.
Investment amount	$50,000 to $1 500,000	$1 500,000 to $5+ million
Investment time	3-7 years	5-7 years
System for analyzing and managing investments	• act solely as individual investors, many have professional investment experience, and bring considerable industry knowledge to an entrepreneur and management team.   • have a practical, hands-on approach to building a company and are willing to work within the structure that the founders have put together.	• have a formalized approach to investing: employ a team of human capital to maximize profit and growth potential (consultants/ associates who are specifically involved in due diligence on potential deals; network of investment bankers and others to provide additional sources of financing for their portfolio companies).   • VCs have more financial, due diligence, and valuation skills.  • have “hands-off” experience.
Strategy and approaches for reasonable return	• risky approach to investing- believes in early-stage investment (seed and start-up stages) strategy in which they can receive more slower and modest returns over their entire portfolio.   • angels are involved in company’s earliest stages because more equity is available at a lower price and there is an opportunity to shape the strategy and development of the business.	• conservative approach to investing- VCs invest in all stages of a company; they believe in the “home run theory” of investing, in which later-stage companies (mature, high market capital companies) will minimize their risk of loss.
Amount of control	play an advisory role for company founder and management team	require one or more board positions to gain control of corporate decisions
Requirements for investing	provide the initial funding of small amounts (up to 1,5 million dollars) for a company, even before the company has demonstrated any kind of success; however, the company must show considerable potential for growth.	provide millions of dollars per investment; however, VC’s invest in companies with a proven track-record of business success. The company must gain $25 million in gross revenue potential from their unique product or service before the investment.
Reasons for investing	financial return, social responsibility, and community involvement	maximize investor returns and outperform other venture funds
National recognition	No. There is no national directory for active angel investors.	Yes. VC’s advertise their location. There are many extensive directories listing active venture capitalists.
Industry and portfolio	Found in all industries, including technology, pharmaceutical,  publishing, insurance, finance, etc., and have diversified portfolios.	Involved in limited industries (mostly technology), and have limited portfolios.
Follow-on investment	Rarely- angels tend to avoid follow-on investing because of the risk of losing more money.	Yes- they will re-invest/put in additional amounts of capital at later stages to assist with growth
Investment Consequence	Angel investors believe in the entrepreneur and invest in them as a person.	VCs are less emotional and are more process involved; they mainly evaluate deals and make offers.

TRANSLATION

1. Translate from English into Russian

Advantages of Raising Money Through Venture Capitalist

1. Money - if you need money for your business to expand, this is the most obvious benefit of having a venture capital fund involved.

2. Venture capital firm contacts to strategic suppliers, customers etc. can be invaluable. VC managers often come from a variety of backgrounds and this is an area where they may help. 

3. Venture capital firm contacts in financials services that may allow the company to attract debt finance at attractive rates

4. A venture capitalist brings the experience of the firm to the table. Often VCs have a background in the industry or consulting and this can be very valuable to open-minded management.

5. A venture capitalist continuously searches for new deals and actively participates in managing the Company. 

6. Venture capital firms normally employ technical assistance grants and hire experts that bring expertise to the Company by providing recommendations and contacts.

7. Companies that have well-known and reputable shareholders are treated differently. Having a big name on the major owners list can open doors to new opportunities. 

8. Networking. Venture capital firms and institutional investors are hubs for networking across the world. Many venture capital firms have hundreds of limited partners that can create value for the company across the globe. 

9. Organizational value. Venture capital firms can bring a sense of organization and structure to the business. They have experience in what is attractive for investors and what needs to be done to make a company trade at a higher multiple on the exchange. 

10. People. A great venture capital manager could do a lot to make the business successful.

 B Translate from Russian into English

Венчурные инвестиции – это вложение денежных средств, представляющих собой акционерный  капитал, в перспективные быстроразвивающиеся  предприятия. Такие инвестиции являются одной из форм внедрения технологических  новшеств.

Функциональной  задачей венчурного капитала является способствование развитию конкретного бизнеса путем вливания определенного количества финансовых активов, взамен которых выдаются акции или часть уставного капитала.

Венчурный капитал  предоставляется в основном компаниям  с явным потенциалом их развития, а не тем компаниям, которые уже заняли свое место на рынке и приносят высокую прибыль. Венчурное финансирование направлено на поддержание новых (необычных, а иногда и экзотических) компаний, что повышает вероятность получения сверхвысокой прибыли, но с другой стороны повышает риск.

LISTENING

Listening 1: Background experience

Listen to Chris Smart of Acacia Capital Partners, a venture capital firm, talking about investments his company makes. Answer the questions.

1. What fields do Acacia Capital Partners invest in?
2. Which industries does he mention that the partnership doesn’t invest in?
3. What happened when Chris Smart previously ran a non-specialized multi-disciplinary fund, and why?

Listening 2: Investing for ten years

1. Where does Chris Smart say venture capitalists get most of their money from? Fill in the gaps.

… so they equally have to raise that money from a 1. ___________    ____________ , and  that in the most general terms is the insurance, it’s the insurance industry, so 2. ________   _________ and 3. _________________   _____________________   provide 4. ___________ funding to venture capitalists. It is actually a very small percentage, so they will put one to three per cent of their 5. _____________  ____________ , and no more, into vnture capital.

 

2. Chris Smart says ‘they’ve got five years to reap’ – what does he mean by this?
3. What is (in theory) the ten-year investment cycle?
4. What does Chris Smart say ‘actually happens’?
5. What should happen at the end of the cycle?

Listening 3: Managing new companies

1. How does Chris Smart describe the sector he works in?
2. What does he say about the managers in this sector?
3. What can the venture capital industry provide apart from capital?
4. What should a start-up do if they do not have the right managerial skills in the company?

Listening 4: Successes and failures

1. What term does Chris Smart use that means knowing that some investments will fail?
2. How does he describe the average technology venture capital portfolio?
3. Which very successful businesses does he mention?
4. What are the names of the venture capital companies that helped them, and made ‘phenomenal returns’? 

Discussion after listening:

• From what Chris Smart says in the four extracts, what kind of skills do you think you would need to be successful in venture capitalism?
• Would you be good at it?

SPEAKING / BUSINESS SKILLS

1. Useful language: Giving presentations /(taken from Market leader, advanced, unit 7 p.66-67)

Opening remarks

• I’m very pleased to welcome you all here this morning
• Thank you very much for coming along to today’s presentation
• It’s my great pleasure to be here today.
• I’m here on behalf of …… , an organization which …

Purpose of the talk

• My aim for today’s presentation is to …
• I want to talk to you about …
• Our company is particularly proud of …
• We firmly believe that …
• As I’m sure you’ll agree … .

When to take questions

• I’ll answer any questions at the end of my talk.
• Feel free to interrupt if you have any questions.
• Please stop me any time you have a question or if you need clarification.

Ex.1. Listen to an introduction to a presentation and complete the speaker’s notes. What expressions does she use to engage the audience’s interest?

Good morning. My name’s Diana Holden. I’m the Finance Director for BZ Systems. I’m here today 1. ……. , our shareholders, about the bright future ahead for our company. I’ll 2. ….. on last year’s financial results. Then I’ll talk about our recent performance in the past quarter. Finally 3. ……. our projections and the company’s expansion plans for the future. 4. ……. Agree that BZ is growing from strength to strength. There’ll be an opportunity at the end of my presentation to 5. …. You might have.  

Presentation tips

Preparation

• Know your audience and visualize your presentation as a dialogue with them.
• Rehearse your presentation – it will help you to feel relaxed on the day.

Visual aids

• Make visual aids clear and simple. Label graphs and figures.
• Add a short sentence or two to a graph describing the conclusions to be drawn.

Delivery

• Pay special attention to your introduction – aim to engage the audience’s interest.
• In the opening lines, establish who you are, what organization you represent and why you are here.
• Briefly explain the purpose of your talk and provide an overview.

Ex.2. Describing financial performance: Listen to Mark Wyllie, CME’s Vice President for Tax and Planning, presenting some figures. Complete this description of the company’s performance and projections.

We’ve got here is a chart showing how our markets are expected 1. …. Western Europe over the 2. … . the data comes from Zenith Optimedia, who do independent forecasting for TV ad markets, and what you can see from year one through to year seven is that Western Europe is expected to 3. …  in advertising terms, but that Eastern Europe, as shown indexed to year one, by year seven will be 4. …… the year-one market, i.e. over the next five to six years, our sales are expected to double as well.

Ex.3. Look at these extracts from company performance reports in the financial press. What expressions are used to describe trends?

1. The firm sank deep into the red during the technology slump.
2. Renault has seen profits leap to worldwide demand for cars from its partner Nissan.
3. The retail chain is in crisis after its shares plummeted on Wednesday.
4. Shares in oil giant have slipped after the company was hit by strikes.
5. Shares in the company dropped sharply after it made losses of $3m this year.
6. Passenger numbers climbed from 1,54 to 1,68 million in a month.
7. Samsung Electronics’ profit surged 81 % in 2004 with profits almost tripling in the last quarter.
8. Apple profits soar due to IPod sales. Apple has seen profits rise four-fold this year.  

Ex.4. You are Vice President of CME. Write the introduction to your presentation about the company’s financial performance for your investors. Use the expressions from this section.

B.          Comment on:

• An economy that does not have a strong venture capital sector is one that displays symptoms of deeper economic problems.
• Venture Capital is the engine fueling innovation in the economy.
• The venture capital business is a batting game. If you hit one out of four, you're a solid player. But in the equity buyout business, since we're putting larger chunks of money into each deal, we can't afford to swing and miss.    David Roux
• Nothing Ventured, Nothing Learned.