Venture Capital and Corporate Venturing Quiz

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Questions and Answers

What is the primary goal of corporate venturing programs?

Maximizing profitability through investments

Increasing market share of the parent company

Accelerating the growth of established businesses

Gaining strategic benefits for the parent company (correct)

Which of the following statements best describes the characteristics of venture capital investments?

They typically use high levels of leverage

They invest in high growth start-ups (correct)

They have a long investment horizon of over ten years

They focus on mature, established companies

What is the defining trait of a Limited Partner (LP) in a venture capital or private equity fund?

They allocate money to VC/PE funds (correct)

They are responsible for raising capital

They conduct due diligence on potential investments

They manage the investments made by the fund

How does an in-house corporate venturing program typically differ from traditional R&D?

It can move faster and more cheaply in developing opportunities Signup and view all the answers

What is a common characteristic of successful entrepreneurs?

Strong interpersonal relationships Signup and view all the answers

Which of the following best describes the median life span of a corporate venturing initiative?

Around 1 year Signup and view all the answers

What is the role of a General Partner (GP) in a venture capital firm?

They raise money for the fund and manage investments Signup and view all the answers

Which of the following is a benefit of Internal Corporate Venturing compared to External VC investments?

Lower operational costs and quicker decision-making Signup and view all the answers

What is a key factor that influences the success of deal sourcing in private equity?

The strength of the partners' network and relationship skills Signup and view all the answers

Which of the following best describes the investment process in a venture capital fund?

Sourcing, due diligence, negotiation, post-investment monitoring Signup and view all the answers

What is the primary disadvantage of general enquiry as a deal sourcing method?

It leads to a lack of quality control over opportunities Signup and view all the answers

What essential characteristic do many partners in private equity usually possess?

A background of over 20 years in related industries Signup and view all the answers

Which of the following sources is NOT typically considered a reliable deal sourcing channel for VC firms?

Corporate finance departments Signup and view all the answers

Which method of deal sourcing is primarily characterized by having no effort yet offering high volumes of opportunities?

General enquiry Signup and view all the answers

What is a common strategy for PE firms to enhance deal sourcing?

Establishing relationships with banks and advisory firms Signup and view all the answers

In which circumstance might co-investors pose risks to deal sourcing?

They expect to invest in future deals with the firm Signup and view all the answers

How do operational backgrounds influence partners in private equity?

They provide advantages in operational assessments of investment opportunities Signup and view all the answers

What is a typical outcome when using a standardized deal screening process?

Improved efficiency in managing deal flow Signup and view all the answers

What is the primary characteristic of a Leveraged Buyout (LBO)?

It requires the acquisition of a controlling interest in a company using significant leverage. Signup and view all the answers

Which strategy focuses on governance improvements and operational enhancements in Private Equity?

Value Creation Signup and view all the answers

What is the main financial goal of Private Equity General Partners (GPs) when investing?

Earning IRRs of more than 20% for their investors. Signup and view all the answers

Which of the following roles do Limited Partners (LPs) primarily serve in Private Equity?

Providers of capital for the PE funds. Signup and view all the answers

How does the 'waterfall distribution' feature function in a Private Equity fund?

LPs receive their invested capital back before GPs earn carried interest. Signup and view all the answers

What type of Private Equity fund strategy involves investing in private companies preparing for an IPO?

Growth/Pre IPO Funds Signup and view all the answers

What typical return structure is expected from Private Equity investments over a 10-year horizon?

A J-curve cash flow pattern. Signup and view all the answers

Which entity often acts as the General Partner (GP) in a Private Equity fund?

Independent finance professionals or firms. Signup and view all the answers

What is the purpose of having a Preferred Return in a Private Equity fund's distribution structure?

To ensure LPs receive a minimum return before GPs can share in profits. Signup and view all the answers

Which of the following is a common operational improvement strategy in Private Equity?

Optimizing sales and marketing strategies. Signup and view all the answers

What distinguishes the American waterfall structure from the European waterfall in Private Equity?

American waterfalled structures allow a catch-up feature for GPs. Signup and view all the answers

What is the main reason for Private Equity funds being known for performance persistence?

Top quartile managers replicate superior returns over time. Signup and view all the answers

In Private Equity, which factor can have a significant impact on the J curve effect?

The timeframe in which capital is returned to investors. Signup and view all the answers

What makes venture capital different from private equity?

Venture capital involves providing funding for relatively new businesses. Signup and view all the answers

Study Notes

Course Information

Course title: Entrepreneurial Finance
Course code: FNCE213
Instructor: Dr Victor Ong DBA
Affiliation: Lee Kong Chian School of Business, SMU

Course Format

Presentation style lectures coupled with interactive discussions
Video clips of private equity and venture capital topics from YouTube
Case studies reviewed throughout the course
Guest speaker session from the private equity and venture capital industry
Assessments include:
- Case studies
- Midterm exam
- Group project presentations
- Final exam

Course Readings

Ramsinghani: The business of venture capital (2nd Edition)
Ippolito: Private capital investing: The handbook of private debt and private equity
De Maria: Introduction to Private Equity, Debt and Real assets (3rd edition)
Puca: Early Stage Valuation – A Fair Value Perspective
Lecture slides available on ELEARN every Friday

Grading

Class Participation: 10%
Case Studies: 10%
Midterm exam: 20%
Group Project: 20%
Final Exam: 40%
Total: 100%

Instructor's Background

Over 20 years of experience in energy and infrastructure investment (buy-side and advisory)
Worked in multinational corporations (e.g., Royal Vopak, Trelleborg) and private equity firms
Experience advising multilateral government-sponsored infrastructure funds
Teaching experience at SMU, including courses on private equity, venture capital, and entrepreneurial finance
Holds degrees from National University of Singapore, Alliance Manchester Business School, and Singapore Management University

Personal Hopes for the Class

Sharing knowledge about private equity and venture capital
Motivating students to pursue post-graduate degrees in the field
Providing opportunities for internships in the private equity and venture capital industries
Encouraging students to develop into PE fund managers or deal advisors/consultants

Life Cycle of a Venture

Stages of new venture development: founding, seed, growth, and harvest
Graph showing revenue, net income, and cash flow trends over time

Sources of New Venture Financing

Chart showing various sources of funding for new ventures at different stages (R&D, Start-up, Early, Rapid Growth, and Exit)

Sources of Venture Financing

Diagram showing overlapping circles for different sources of venture capital funding for different stages of a venture (e.g., friends and family, angel investors, seed funds, venture funds, private equity, etc.) at different investment amounts

Un-intermediated Finance

Business angels and corporate venture capital (CVC) investing directly into portfolio companies

Business Angels

Affluent individuals providing capital for start-ups
Usually in exchange for ownership equity or convertible debt
Investment gap between friends and family financing and venture capital
Investment amounts range from thousands to millions
Typically shorter investment horizons than venture capital firms

Incubators and Accelerators

Supporting new businesses to attract VC investment
Incubators focus on disruptive ideas; accelerators focus on scaling existing companies

Corporate Venturing

In-house VC programs (funds, incubators, and accelerators)
Facilitating the development of new businesses in a quicker and more flexible manner than traditional R&D
Aimed at gaining strategic benefits rather than maximizing profits for VC strategies

Intermediated Finance

Venture capital funds invest in high-growth startups with little or no leverage
Buyout funds invest in mature, established companies, employing significant leverage
Limited partners (LPs) invest in funds; general partners (GPs) manage the fund
Entrepreneurs receive funding through a fund vehicle

Introduction to Entrepreneurial Finance (Session 1)

No dedicated information

PE and VC Investment Industry Definitions

No dedicated information

Private Equity Industry Snapshot

Global PE assets under management are projected to reach 8.5 trillion by 2028
2024 alternative reports

Private Equity Deal Flow and Realizations

Figures visualizing PE deal flow and realizations trends over time

Venture Capital Fund Raising and Dry Powder Status

Charts showing fundraising trends and dry powder in venture capital

Private Equity Stakeholders

General partners (GPs) manage PE funds; limited partners (LPs) invest in them
Compensation for GPs typically includes management fees and carried interest
Key stakeholders also include pension funds, endowments, financial institutions, insurance companies and sovereign funds

Private Equity Returns and Business Model

PE funds typically have a 10-year investment horizon
Top-quartile PE managers have demonstrated performance persistence

Top 20 PE Firms by Capital Raised

Table listing leading private equity firms and their capital raised in the last 10 years

PE Remains as the Highest Performing Asset Class

Graph illustrating PE's historical outperformance of other asset classes

Outperformance of Private Equity

Data visualizing Private Equity's outperformance relative to other investments

Annual PE Returns

Correlation analysis reveals negative correlation between PE returns and S&P 500 returns

Correlation Analysis of Traditional and Alternative Asset Classes

Tables displaying correlation analysis data for various assets, including private equity

PEVC Fund Structure

Diagram illustrating the structure of a PE/VC fund (Warburg, Pincus & Company; Limited Partners; Insurance Pension Funds; Other Venture Funds)

Private Equity Structure

Diagram illustrating the 2 & 20 fee structure of a Private Equity firm

How a Waterfall Distribution Works

Illustrative diagram depicting how distributions are made to LPs and GPs based on hurdle rates

Waterfall Distribution with Catch Up Feature

Detailed example illustrating LP and GP payouts with a catch-up mechanism

J Curve Effect in PE

Chart demonstrating a J-curve pattern in PE investments, starting with negative returns, then eventually showing positive returns

PE Fund Types and Strategies

Detailed summary of various PE fund types and strategies (Buyout funds, Growth/Pre IPO, Co-investment, Secondaries, PIPE, Infrastructure and Real estate PE Funds, Fund of funds)

PE Strategies (Continued)

Explanation of various PE strategies, including different types of buyout funds, growth investments, co-investments, secondaries, and PIPE investments into public equity.

PE Strategies (Continued 2)

Description of private investment into public equity, infrastructure and real estate investments

Overview of PE Fund Strategy Performance

Charts comparing performance of different PE strategies using different performance metrics such as multiple and DPI

Investor Preferences on Fund Strategies

Graph showing investor preferences for different fund strategies in Asia

Venture Capital

Startup financing through capital exchange for equity
Methods of exit include sale, IPO and strategic partnerships
Various VC firms are discussed: Cisco and Intel capital, Singtel ventures, SPH ventures

Choosing a Venture Capitalist

Guidelines and considerations for selecting a VC (financial strength, management style, network, exit strategy, VC with Singapore presence)

Venture Capital Investment Stages

Stages in venture capital investment: seed, early, Series A & B, and Late Stage (Series C)

Top 20 VC Firms by Capital Raised

Firms and their respective capital raised in the past 10 years

Venture Capital Deal Numbers by Stage

Charts displaying VC deal numbers across different stages over time, highlighting the relative number of funding deals in earlier stages

Family Offices

Investment vehicles set up by family-owned or controlled businesses
Aim for long-term sustainability and diversification outside the core business
Primarily focused on lower amounts of investments
Employing mostly family members in some cases and hiring professionals in many cases

Multilaterals and Sovereign Investors

Institutions supported by state governments
Multilaterals like the World Bank and IFC invest directly in infrastructure projects
Sovereign wealth funds have a significant presence in the PE market

Top 10 Sovereign Wealth Funds Globally

Table listing the top 10 Sovereign wealth funds and their assets, inception date, and origin

PE Investment Process (Overview)

Cyclical process: sourcing, selection, negotiation, and monitoring

Steps from First Contact to Deal Conclusion

Detailed steps from initial contact to deal completion stages

PE and VC Governance - Investment Committee

Structure and functions of an investment committee
Key tasks for deal approval and oversight

Class Activity 1

Hypothetical scenario: setting up a PE investment program with $500 million allocation

Performance Measurement

Different tools for PE fund performance evaluation
Importance of understanding how the different tools work
Comparison of PE versus Mutual funds & listed funds

Performance Measurement (Continued)

Further exploration of Net IRR, Multiple, DPI, RVPI, and PME metrics

Performance Measurement (Continued 2)

Further exploration of these valuation metrics for PE funds within investment horizons

Performance Persistence in PE

Academic research and persistence of top-quartile PE performance findings

Performance Persistence in PE(Continued)

Concerns from academic research on PE performance measurements

Class Activity 2

Hypothetical scenario: an LP evaluating investments across different PE funds

Concluding Remarks

Course wrap up, expectations, and Q&A session

Fund Raising and Deal Sourcing Process (Session 2)

Fund raising process as not a glamourous process
Steps in Fund Raising Process: Prepare- Soft-Launch - First Close - Final Close

PE and VC Fund Raising Issues

Difficult and stressful for GPs.
Steps in Fund Raising: Private Placement Memorandum; Subscription agreement; Limited Partnership Agreement; General Partner agreement; Side letters;

Fund Raising Process - Not a Fun Process

Common concerns for fund managers

Fund Raising Process Stages

Preparing for a fund raise
Soft launch: Meeting with investors, seeking feedback and obtaining soft commitments
First close: Reaching the target or percentage set for the fund to be fully invested
Final close: occurs within 12 months of the first close

Fund Raising Process - The Mechanics

Details of paperwork and procedures in a fundraise

Fund Marketing Materials - PPM

Preparation of a Private Placement Memorandum (PPM)

Fund Marketing Materials - PPM (Continued)

Sections of a PPM, emphasizing the importance of the presentation deck and executive summary

Presentation Slide Deck

Presentation guidelines for fund raising

Key Fund Terms

Fund Size, Commitments, Investment Strategy, Industry Focus, Geographic Focus, Term, Investment Structures, and Portfolio construction and governance are all analyzed

IPO Underpricing Issues

IPOs generate strong returns but can be underpriced
The goal is for the stock price to rise on the first day for the benefit of investors and underwriters

IPO Underpricing Issues (Cont'd)

Money left on the table: company to investors

Private Exchanges

Description of private exchanges (intermediaries)

Special Purpose Acquisition Company

IPO structure for acquiring or merging with other companies

Exits through Secondaries PE Transactions

Secondary transactions in the PE market

Valuing Secondary Stakes

Methods of estimating the secondary price of a PE transaction through discounting future cash flows

Example of a Secondaries Deal Valuation

Hypothetical secondary market valuation example

Process and multiple skillsets in PE and VC

Investment stages

Illustration of the skillsets required at different stages of PE and VC investment lifecycles

Bloomberg Article Discussion

Discussion points based on a Bloomberg article focused on IPOs

Class Activity 1

Hypothetical scenario: A seasoned PE fund manager team setting up their own fund

Class Activity 2 (Cont'd)

Further hypothetical scenarios: How to negotiate the scope of engagement and fee structure for deal advisory firms

Concluding Remarks

Course wrap-up, expectations, and Q&A session

Course Wrap Up and Review (Session 11)

Recap of the course coverage
Hypothetical case studies and discussion questions

Case Study 4 - Discussion

Case study: Usertip - startup that provides training modules for company staff

Course Coverage and Focus Areas (Cont'd)

Review of the course structure & important topics

Group Project Presentation Briefing

Presentation guidelines and requirements for group presentations

Final Exam Briefing

Exam guidelines are laid out (length, specifics)

Hopes and Expectations for the Course

Student expectations for the overall course
Opportunities for future engagement in the PE/VC sector

PE Performance and LBO Analysis (Session 6 and 7)

Principles of Performance Attribution
Value Attribute Analysis

Performance Metrics

Overview of metrics used to evaluate PE fund performance (Net IRR, Multiple, DPI, RVPI, PME)

LBO Method and Analysis

Background information on Leveraged Buyouts (LBOs)

Video Clips Time – LBOS during the 80s

Visual aids showing examples of LBOs via videos

Different Types of LBO

Different types of LBO situations

Typical LBO Candidate

Characteristics of companies that are commonly acquired via LBOs

LBO Scenarios

Scenarios under which LBOs occur

Some more reasons for LBO deals

Various reasons why companies initiate an LBO

LBO Capital Structure - Sources and Uses

Different sources of capital for an LBO
How capital is utilized in an LBO transaction

Financing Instruments in an LBO

Financing instruments typically used in LBOs (Senior Debt, Subordinated Debt, Mezzanine Financing, Equity)

Recapitalization Definition

Description of leveraged recap

Management Buyout (Envy Ratio)

Applying the Envy Ratio in a buyout context – relationship between equity ownership prices by private equity investors versus the managers.

LBO Analysis: Buy-side and Sell-side

Discussion of the analysis from both sides of an LBO context

Procedural Steps of an LBO Analysis

Qualitative and Quantitative steps required for valuing companies acquiring through LBOs.

A Simple Example of an LBO Deal

Walkthrough of a hypothetical deal based on the characteristics identified previously

More Advanced LBO Model (Excel Model Run)

Details about running a more advanced LBO model in excel

How Can Sponsors Boost LBO Returns?

Various strategies for promoting LBO returns

Case Study: Acquisition of RJR Nabisco 1988

Detailed analysis of one particular successful LBO case

Case Study: Acquisition of Celanese by Blackstone

Detailed case analysis of a major buy-out

Attempted MBO of a Listed SGX Company

Detailing another major case analysis (MBO)

Private Capital Investment Differences

Comparison of VC, Growth Equity/Pre-IPO, and LBO deals

Class Activity 2

Discussion points to consider for a later LBO and VC analysis

Concluding Remarks

Course wrap-up, expectations, and Q&A session

Case Study: Mobike

Detailing a case study on Mobike – a bike sharing business in China

Case Study: Mobike (Discussion Board)

Discussion around the implications of Mobike-related investments

Case Study: Actis

Detailed analysis of the Actis case study – detailed scenario-based approach and considerations

Case Study: Actis (Cont'd)

Further discussion points related to the Actis case study

Case Study: Actis (Discussion Board)

Continued discussion relating to Actis case

Extra Knowledge: PE Performance (Doctoral Research)

Focus on dissertation coverage topic

Proposed Research Hypotheses

Research hypotheses for a study on PE fund returns

Data and Methodology

Data handling: Data sources, variables used (including detailed variables)

OLS Baseline Regression Model

Details of regression model for testing hypotheses

OLS Baseline Regression Model Findings

Summarizing major findings from the regression model in respect of PE fund performance

OLS Main Regression Model

Details of the main, more complex regression model

OLS Main Regression Model Findings (Cont'd)

Additional findings from the main regression model, including detailed statistics

Geographical Diversification and PE Returns

Analysis of various findings using various data visualization methods relating to graphical representation of data

Deal Structuring in PE and VC (Session 9)

How deal structuring works in PE and VC, as well as the factors of deal structuring

Stress Points: Differing Goals of Entrepreneur and Investor

Potential stress points in deal structuring between investors and entrepreneurs

Investment Structure in VC Deals

Different forms of VC investments

Structuring to Generate Target Returns

Key factors in structuring a PE or VC deal

Deal Documentation

Detailing important documentation types in a deal sourcing

Letter of Intent (LOI), Term Sheet and Legal Docs

Importance of legal documentation for a PE transaction

Describing the elements of a Share Purchase Agreement

Further detailing about the SPA process

Shareholders Agreement (SHA)

Provisions common to Shareholders Agreements

Shareholders Agreement (SHA) (Cont'd)

Further details related to Shareholders Agreements

Case Study: Brazos Partners

Detailed analysis of a case study on Brazos Partners in relation to leveraged buyouts

Case Study: Brazos Partners (Cont'd)

Discussion points relating to the Brazos Partners case study and its implications

Some Best Practices in PE and VC Management

General best practices during investment (fund governance, management, and operations)

Bloomberg Article Discussion

Discussion points on the shift of PE focus

Class Activity

Specific case study exercises used to analyze real-life PE and VC transactions

Concluding Remarks

Last session summary

Studying That Suits You

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Description

Test your knowledge on the key concepts of venture capital and corporate venturing programs. This quiz covers characteristics of investments, roles of partners, and successful entrepreneurial traits. Discover how corporate venturing differs from traditional R&D and more.