65 Questions
What are the main sectors included in Private Equity (PE) according to the text?
Venture Capital, LBO, distressed debt investments
What is the general trend of PE investments over the last 20 years?
Going up
What kind of companies does Venture Capital (VC) finance, according to the text?
Innovative companies in terms of technology and business models
What is the main impact of Private Equity (PE) on employment, as mentioned in the text?
PE has a deep impact on employment
What is the purpose of proportionate ownership in the context of new share issuance?
To prevent dilution and maintain the same percentage of ownership for old shareholders
What is the purpose of a non-competition agreement in the context of a company's founders and team?
To ensure the founders and team stay in the company for at least 1 year
What is the potential drawback of 'shopping around' when presenting a company to various VCs?
Your idea becomes known by a lot of investors
What are the matters requiring approval from investors as per the provided information?
Making any loan or any advance
What is the purpose of confidentiality in the context of presenting a company to VCs?
To protect the company's idea and information
What is the primary function of a non-competition agreement in the context of the Silicon Valley and Massachusetts?
To highlight the difference in respect for non-competition agreements
What is the purpose of debt restructuring as mentioned in the provided information?
To renegotiate existing debt contracts
What is the significance of the Board of Directors meeting at least 4 times a year?
To ensure regular oversight and decision-making
Who is responsible for the day-to-day management of Private Equity (PE) funds?
General Partners (GPs)
What percentage of the partnership do Limited Partners (LP) typically own?
99%
What is carried interest in the context of Private Equity (PE) funds?
20% of profits taken by General Partners (GPs)
What is the focus of venture capital (VC) industry?
Life of a company from seed/angel stage to exit/maturity through IPO or M&A
In which region did the venture capital (VC) industry originate?
The US
Who are the biggest investors in the venture capital (VC) industry in Europe?
Government agencies, corporate investors, pension funds, insurance companies, and private individuals
What led to increased investments in venture capital (VC) in the US?
A rule in 1979 prohibiting pension funds from investing substantial amounts in PE or other high-risk asset classes
What are Gatekeepers in the context of the VC industry?
Investment advisors who help funds with venture investments
What is the typical duration of Private Equity (PE) funds?
Between 12 to 15 years
Who owns 1% of the partnership in Private Equity (PE) funds?
General Partners (GPs)
What do Limited Partners (LP) put restrictions on in PE funds?
Minimum and maximum fund sizes, reinvestment of profits, and investment of GPs' personal funds in portfolio firms
What is the typical focus of General Partners (GPs) in the Private Equity (PE) industry?
Investing in companies and playing an advisory role in helping them grow and improve their performance
Which valuation method does not consider flexibility in valuation, such as production rate changes and project abandonment?
Option pricing
What does a call option give the right to?
Buy an asset at a specified exercise price
Which factors affect the value of a call option?
Underlying stock price, exercise price, volatility, time of expiration, and risk-free rate
Which model is used to value real options, considering project expenditures, cash flows, and risk factors?
Black Scholes Option Pricing Model
What does the option theory value the second investment in the Mark Project at, despite negative NPV?
53.6 million
What are the weaknesses of using option pricing for valuation?
Difficulty in estimating volatility and the formula's limitations
What does the venture capital method involve computing?
Final firm value, discounting it, and computing the required final percent ownership
What are key factors in the venture capital method?
Future dilution and the battle between entrepreneurs and VCs over company valuation
What does the incorporation process involve?
Applying for a corporate charter, signing bylaws, liquidation, winding up, and dissolution
What is the primary goal of venture capitalists when investing in high-growth companies?
To provide strategic advice and aim for an exit through acquisition or IPO in 5-10 years
Which sector received substantial VC funding in 2020, although it was less than software and IT?
Pharma & Biotech
What method is used to compute cash flows, terminal value, discount rate, and DCF in valuation?
Discounted cash flows
Why are start-up valuations more challenging compared to established companies?
Due to the lack of available data and non-liquidity of private company stocks
What is a characteristic of VC projects?
High risk and negative cash flows in the initial years
What is a challenge in using comparables for private companies in valuation?
Lack of available information
What method considers cash flows, terminal value, discount rate, and DCF in valuation, accounting for risk, beta, and sensitivity analysis?
Discounted cash flows
What is used to identify firms with similar characteristics and potential measures of value in comparables?
Comparables
What does the discounted cash flows method consider for start-up valuations?
Cash flows, terminal value, discount rate, and DCF, with considerations for risk, beta, and sensitivity analysis
What is a challenge in valuation methods for private companies?
Overvaluation of comparable companies and unavailable information
What is a characteristic of VCs' investment preference?
Prefer less risky late-stage investments
What role do Business Angels play in the investment landscape?
Invest their own money in promising companies
What is the rationale behind stage financing?
To provide funding for different stages of firm growth and to incentivize entrepreneurs to achieve objectives
How is pre-money valuation calculated?
By subtracting the amount of investment from the post-money valuation
What is the purpose of giving stock to employees over time?
To retain employees and prevent them from leaving the company
What does 'Series A' typically indicate?
The first time that this type of shares are issued
What is the purpose of preferred equity conversion into common stock?
To offer the possibility of higher returns if the stock price rises
What is the purpose of liquidation preference in preferred stock?
To ensure preferred stockholders receive their investment back before common shareholders
What is the purpose of optional conversion for preferred stock?
To allow conversion of preferred stock into common stock at the discretion of the holder
What is the purpose of mandatory conversion for preferred stock?
To force conversion of preferred stock into common stock in case of IPO
What is the purpose of lock-up clauses?
To force shareholders to keep their shares for a specified period
What is the implied post-money valuation after the first round of financing?
$60m
What is the dilution after the second round of financing?
66.66%
What is the value of common stock received by preferred stockholders on an as-converted basis?
$10,000,000
What is the purpose of the lock-up clauses?
To force shareholders to keep their shares for a specific period in the USA
What is the condition for preferred shareholders to gain from conversion if the conversion ratio is 6?
Shares need to be trading above $16.66
What is the value of the special dividend received by preferred stockholders?
$5,000,000
What is the purpose of a nonparticipating preferred stock?
To behave like pure debt
What is the purpose of full participating preferred stock?
To share the remaining amount with common stockholders
What is the purpose of a cap on preferred stock participation rights?
To offer higher returns to shareholders
What is the condition for mandatory conversion in case of an IPO?
IPO with a price of 1.5x the original purchase price
What is the purpose of the conversion ratio in the context of preferred equity?
To determine the number of common stock received upon conversion
Study Notes
Venture Capital and Valuation
- Venture capitalists (VCs) raise capital from Limited Partners (LPs) and invest in high-growth companies, providing strategic advice and aiming for an exit through acquisition or IPO in 5-10 years.
- There are different types of VCs: independent VCs like KPCB and Sequoia Capital, corporate VCs like Google Ventures, and bank VCs. Business Angels also play a significant role, investing their own money in promising companies.
- VCs prefer less risky late-stage investments, while early-stage and angel/seed investments receive a smaller part of VC investment.
- In 2020, Pharma & Biotech received substantial VC funding, although it was less than software and IT, as these sectors are where innovation takes place.
- VC projects are characterized by high risk, asymmetric information between VCs and entrepreneurs, negative cash flows in the initial years, and intangible assets with high and fast growth potential.
- Valuation involves using comparables, which can be challenging for private companies due to the lack of available information.
- Discounted cash flows are used to compute the cash flows, terminal value, discount rate, and DCF, with considerations for risk, beta, and sensitivity analysis.
- Comparables involve identifying firms with similar characteristics and searching for potential measures of value, such as PER, market value/total revenue, and market to book ratio.
- Start-up valuations are more challenging due to the lack of available data and the non-liquidity of private company stocks.
- The discounted cash flows method considers cash flows, terminal value, discount rate, and DCF, with considerations for risk, beta, and sensitivity analysis.
- The DCF calculation includes considering the terminal value and sensitivity analysis, accounting for different values for the parameters.
- Valuation methods have their challenges, such as overvaluation of comparable companies, unavailable information, and differences between public and private companies.
Test your knowledge of venture capital and valuation with this quiz. Explore topics such as types of venture capitalists, preferred investment stages, sectors receiving significant funding, valuation methods, and challenges in valuing private companies.
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