1. An entrepreneur seeks $4 million from a venture capitalist. They agree that the entrepreneur's venture is currently worth $12 million and that, when the company goes public in an IPO three years hence, it will have an expected market capitalization of $70 million. Given the company's stage of development, the VC requires a 40% return on investment. What fraction of the firm will the VC receive in exchange for its $4 million investment?
2. The venture capital fund Techno Fund II made a $4 million investment in Optical Corporation five years ago and, in return, received 1 million shares representing 20% of Optical Fiber's equity. Optical Fibers is now planning an initial public offering in which it will sell 1 million newly created shares for $50 per share. Techno has chosen to exercise its demand registration rights and will sell its shares-alongside the newly created shares-in Optical Fibers' IPO. The investment banks underwriting Optical Fibers' IPO will charge a 7% underwriting spread, so both the firm and Techno Fund II will receive 93% of the $50-per share offer price. Assuming the IPO is successful, calculate the compound annual return that Techno will have earned on its investment.
Mini Case- Entrepreneurial Finance and Venture Capital
Through your financial services firm, Vestin Capital, Inc., you have raised a pool of money from clients. You intend to invest it in new business opportunities. To prepare for this endeavor, you decide to answer the following questions.
1. What are some of the challenges of financing entrepreneurial growth companies (EGCS)?
2. What are the different types of venture capital funds?
3. What are some choices for organizing a venture firm?
4. In what ways should a venture capital firm structure its investments?
5. Should venture capital firms use convertible securities?
6. What are some of the exit strategies that may be available to a venture capital firm?