Hang tight while we fetch the video data and transcripts. This only takes a moment.
Connecting to YouTube player…
Fetching transcript data…
We’ll display the transcript, summary, and all view options as soon as everything loads.
Next steps
Loading transcript tools…
Ch 12 Informal Risk Capital, Venture Capital, and Going Public | Jonathan Keisler, PhD | YouTubeToText
YouTube Transcript: Ch 12 Informal Risk Capital, Venture Capital, and Going Public
Skip watching entire videos - get the full transcript, search for keywords, and copy with one click.
Share:
Video Transcript
Video Summary
Summary
Core Theme
This content outlines the various stages and sources of business financing, with a particular focus on risk capital markets, including informal (angel investors) and formal (venture capital) avenues, and the crucial role of a strong business plan in securing investment.
Mind Map
Click to expand
Click to explore the full interactive mind map • Zoom, pan, and navigate
chapter 12 and formal risk Capital
so how do you finance a business well
the sources of funding develops through
stages you have early stage financing
which is the most difficult you haven't
really proved anything or no one knows
you and it's costly to obtain seed
capital is usually a small amount for
proof of concept
meaning stuff you've you've invested in
there and market feasibility studies you
know why would your business work that's
a big part of your business plan startup
financing pays for developing and
selling initial products to determine
the feasibility of your commercial sales
development financing is the next step
step or next stage if you will
it's a working capital supports the
initial growth in the third stage the
company has positive cash flow and uses
funds for sales expansion so you pull
out back into the business the fourth
stage is uh the funds are used before
going public or being purchased
depending on what your in-game is there
um you're in games probably to make
money so you can go public and have
solve stocks which then makes your money
or you can actually sell off the company
to say a larger company either are
excellent plans I need to know what your
plans are in this class acquisition
financing is used for Acquisitions lbos
are going public
now let's talk about risk Capital
markets there are three risk Capital
markets for finance Finance growth uh
not Financial growth Finance growth the
public Equity Market is available for
high potential uh Ventures that's
selling shares or selling you know bonds
or well let's say shares to the to folks
in the public Venture Capital Market you
can have a VC
um provide some first stage funding for
larger Ventures you can find you know
someone who invests in companies
professionally and try to convince them
that you're worth investing in they
become basically your partner in it the
best source for first stage funds is the
informal risk Capital Market
um but you're talking more like hey
going to the bank going to the Local
Credit Union that type of thing the
private Equity Market provides capital
for private Ventures the market consists
of individuals like Angel Investors
Venture Capital firms and private Equity
Funds so you can find groups that will
invest in your business basically like
you're a stock informal risk um Capital
Market continued or excuse me this we
were talking about the risk Capital
Market in general this is the informal
risk Capital Market this Market is a
group of wealthy investors called
business angels or angel investors who
look for Equity investment opportunities
they basically want to you know take
their funds help you do your idea and
then you both profit from it Angels
provide funds for all stages but
particularly in startup funds if you see
Pitch competitions that that type of
thing on a formal stage generally
speaking there are business angels in
the audience listening to them
um this is the largest pool of risk
capital in the U.S and the size of the
number of investors has increased in
recent years the angel and money
um available for investment each year is
about 20 billion dollars so don't tell
me it's not out there you got to go get
it it starts with a great business plan
which is why that's what you're doing
here tell me how you innovate how you
create value and I can tell you there
are people out there that want to invest
and formal investors tend to be well
educated they tend to invest in firms
geographically close to them it's a kind
of a regional deal they make one or two
deals a year averaging 340
000 so keep that in mind when you come
ask me for a billion bucks all right
it's probably not even going to be 340
000. they may join with other angels to
finance larger deals if it's a bigger opportunity
opportunity
so where do angel investors find their
Deals Deals are found through business
associates friends personal searches
investment bankers and business brokers
an Angel Network
um our group of angels organized into
networks and or funds and growing and
more common way to find a deal
generally speaking your local Chamber of
Commerce probably knows these people but
they're going to be very guarded before
they give you this information because
well they don't want to ruin their
relationship by sending them every Tom
Dick and Harry they want to send them
people who have a good business plan
with a solid plan it sounds like we
might have a reason for doing that in
this class
organize angel investor groups are
spreading in the U.S it's becoming more
of a thing I think it's been popular
rely popular
become more popular popularized is that
a word
um in America I think a lot of it has to
do with shows like the Shark Tank the
networker fund meets about six to ten
times per year basically anytime they
want to meet you better meet with them
uh we're select entrepreneurs may
present their business idea investment
is made individually and or with other interested
interested
business angels now crowdfunding has
become a thing crowdfunding is also an
individual investment
it can be used to pre-test a product or
service I think your generation invented
this is pretty cool uh this brings
together various individuals who commit
money to projects and companies they
support reward-based crowdfunding is
when individuals pledge money to a
company for developing a new technology
a new cultural art project or a new
music album or even a t-shirt we've seen
that lending crowdfunding allows
borrowing companies to occur
um debt funds without going through
traditional providers this is usually
the bar is a little bit lower but you
also have you know things you have to
pay if you can't pay it back that type
of thing Equity crowdfunding allows
individuals to invest in private
companies for percentage share of the company
company
other crowdfunding sites focus on real
estate human capital that type of thing
you can crowdfund into say a real estate
fund that will buy real estate say on
Coastal Florida that type of thing I
mean there's risk there but um
um
there's all kinds of stuff you can get
into both as a borrower and an investor
when it comes to crowdfunding
crowdfunding campaign successful
crowdfunding campaigns take time and
planning to develop a marketing campaign
execute a campaign and provide excellent
service to determine the crowdfunding
site you will you will use so here's
things you have to do determine the
crowdfunding site that you will use to
raise Capital there's plenty out there
just Google crowdfunding site
um create a video explaining what you
are doing with an emotional appeal why
people should care about what you're
doing and the feasibility of what you're
doing establish a budget showing
short-term costs sounds familiar doing
that in this class indicate the specific
tasks to be funded structure some
appropriate rewards and establish a
deadline for a campaign now Venture
Capital we touched on this lightly in
the last chapter let's dive in a little
further broadly venture capital is
professionally managed pool of equity
Capital the equity pool is fueled by
wealthy limited partners other investors
our Pension funds endowments and other
institutions including foreign investors
the pool is managed by General partner
The Venture Capital firm in exchange for
a percentage to gain realize for for
gain realize to make money in a fee
um venture capital is a long-term
investment so it's a long place this
isn't you know quick money back the
venture capitalist takes an equity
participation and is actively involved
monitoring the company and bringing
needed business skills to a firm so an
overview of the Venture Capital industry
the role of venture capital became an
industry after World War II with the
American Research and Development
Corporation are the small business
Investment Company act which we talked
about in the previous chapter form the
small business investment companies svic firm
firm
uh aspects
um were the start of formal Venture
Capital industry uh some of you were
talking again post World War II into
evolving here in the 1960s during the
1960s small private Venture Capital
firms emerged uh usually formed as
Partnerships with Venture Capital firm
acting as a general partner and a
limited partner supplying the funding so
you have the kind of people with money
putting them into this partnership and
this partnership investing in companies
they think can succeed you have to
convince them to be a recipient that you
can succeed thus you have to be able to
make a business plan so making a
business plan might be a good idea for
an MBA program where you are trying to
get entrepreneurs at least familiar with
all aspects of Entrepreneurship that's
the point of the course also Venture
Capital divisions of major corporations
were formed so big corporations started
doing this as well and they can invest
in startups and if the startups does do
well and let's say they're in the same
industry they can acquire the startup
and make it a part of their company so
pretty good exit strategy if you're an
entrepreneur geographically oriented
generally Venture Capital funds were
created for economic development and
very based on the state basis every
state has a program
I've been quite impressed with South
Carolina's programs where this college
is located in particular in the upstate
of South Carolina it's been a ton of
development if you think a lot of the
corporations big and small that have
moved to the area The Venture Capital
industry continued here University
sponsored eventual Capital funds uh
philanthropic Venture funds are usually
managed as separate entities uh the
basically like a business incubator a
business investment organization Under
the Umbrella of a university or college
The Venture Capital industry has not
returned to the highest level invested
in 1999 to 2000 which was uh one point
or excuse me
104.7 billion and over 7 800 deals in
2017 status touchdated because this book
quite frankly is a touchdated but we're
trying to control your costs so you'll
have more ability to bootstrap your own
projects but anyway in 2017 the three
primary Industries invested in where the
internet Healthcare and business product
products in general the amount or the
largest amount raised from a later stage
financing in 2017 but traditionally
expansion stage is the largest category so
so
generally get more money as the business
proves itself less up front
medium in the middle once you've proven
yourself you can get more money
the New York Metro areas receive the
largest amount of venture capital
geographically speaking in the United
States and probably in the world just
because that's kind of the financial
capital of the world so there's a lot of
venture capital Angel Investors a lot of
programs for that general area The
Venture Capital objectives and criteria
the objective of venture capital firm is
to generate long-term capital through
debt and Equity investment so they take
money give it to businesses with terms
either you give me a piece of equity you
may be a part of an owner or we're going
to loan you this money and you pay us
back plus interest the objective of the
entrepreneur is survival of the business
of course return on investment Roi
criteria increases with the increased
risk of early stage financing so the
more money you put up from up front in
an unproven firm the more it is at risk
the venture capitalist does not seek to
control a company but usually wants at
least one seat on the board of directors
they want to at least have a say
investment criteria includes financially
being financially committed first-rate
management teams are supported by family
members the product must also you know
must be unique product or service must
be unique it must solve a problem it
must create value it must be Innovative
name of the course the opportunity must
have significant capital appreciation
thus you know a greater ceiling for
growth so a higher Roi
now the Venture Capital process there's
a preliminary screening that begins with
their seat of the business plan okay see
where you're doing a business plan
here's the thing you turn on a crap
business plan you're gonna get a crap
grade okay
turn a great business plan you're gonna
get a great great why because that
reflects the Venture Capital process you
turn in a weak business plan you're not
going to get investment you turn in a
great business plan you still might not
get investment but at least you have you
have a chance the business plan is your
foot in the door you must have a clear
Mission and objectives
the executive summary is used for
initial screening I told you guys this I
told you I told you if you're watching
the other
um uh lectures people just look at that
executive summary which should be
written dead last when you figure out
exactly what your business is okay
people are trying to write it first I
don't get it uh written dead last people
look at your executive summary if if
that raises their interest they're going
to flip straight your financials if if
that is solid then they're going to read
the whole thing
executive summary matters the investor
evaluates the business determines the
deals fit into their portfolio whether
you make sense in their portfolio think
about like you're being a stock in their
portfolio they want to return on that
stock they investigate the industry and
your management team that's why you got
to do an industry analysis what analysis
of yourself and your competitors and
tell me why your management team is the
exact right team to put this together
and what holes do you have and how do
you plan to address it when it comes to
your management team the second stage of
the agreement on is on general terms the
third stage is detailed review and due
diligence this is the longest stage
takes takes anywhere from one to three
months the last stage is final approval
includes a comprehensive investment memo
so we do largely largely in this course
right here
because it's where you start and if you
can't get your foot in the door with a
business plan you're not going to get
any money anyway so none of this other
stuff matters this is where we start
then put everything else you got in this
degree together and you can navigate these
these
makes sense right locating and
approaching uh Venture capitalists only
approach firms who may be interested in
your opportunity research prospective
firms carefully including Regional and
National Venture Capital associations
approach your Venture capitalists in a
professional business manner you know
have your stuff together seek an
introduction Venture capitalists tend to
focus on referrals select the right say
your net worth is your network baby
Network equals net worth so always be
networking select the right venture
capitalist and don't shop your deal
around find the right one don't present
it to everyone because they want to have
exclusive rights bring one and only one
or two members of the management team
not the whole team you don't want to you
know freak them out a little bit develop
a brief well thought out oral
presentation it can be anything from an
elevator pitch to a 10 minute let's say
presentation which it's much more likely
you're going to get a lot less than 10
minutes you might get a minute
um a favorable first meeting May lead to
additional meetings and reaching an
initial agreement on terms if rejected
several other uh select several other
non-related firms to go find somebody else
else
I sell it too and
always learn was an interview or a sales
pitch or whatever or else
always learn what went well what didn't
go well what can I improve
okay you get better every time by
valuing your company the factors in
valuation so what value should you place
on your company people typically
overshoot this but the factors in
valuation include the nature and history
of the business the Outlook of the
economy in general and the industry in particular
particular
the book value net value of a company
stock and the company's overall
Financial condition
um the future earnings capacity with the
data to back it up is the most important
factor that's going to be something I'm
going to look at in your business plans
the dividend paying capacity is the
future capacity to pay
rather than actual dividend payments
um an assessment of Goodwill or other
intangibles is a six Factor the seven
factors assessing the previous sale
Equity so like if you sold it before or
people invested in it before that's a
good that's kind of like a recent
appraisal if you will and the final
factor is the market price for a similar
company's Equity so you can compare to
neighboring companies in the same
industry ratio analysis calculations of
financial ratios can be used as
analytical and control mechanisms to
test the financial well-being of a firm
these ratios measure the financial
strengths and weaknesses of a venture
uh but they are only one control measure
there are industry rules of thumb when
um interpreting the financial data the
different types of ratios uh most
popular here are liquidity ratios how
much cash flow that goes back to cash
flow that really does liquidity ratios
activity ratios leverage ratios how much
debt you have profitability ratios that
that describes a lot of profitability
we're going to go through these
I think one by one here uh liquidity
ratios up first the current ratio
measures the short-term solvency of a
venture and its ability to meet its
short-term debts so
a ratio of two to one
is favorable but compare with your
industry standards Uh current ratio so
your assets like things you you own
things you put in the positive category
over things you owe okay so you rather
this be two to one so like 100 to 50 okay
okay
um in terms of dollar figures the acid
test ratio is a more rigorous test of
short-term liquidity of a venture and
eliminates inventory so it ticks like
things you have on your shelf out
um the ratio of one to one is favorable
so you want to take your current assets
so same thing here current assets of
reliabilities only from current assets
you check out your inventory
um so this lets you know okay so if
you're a
a factory that makes luxury golf carts I
don't know why that just popped in my
head but you would take okay the value
of the factory the machines the human
capital cash on hand but take out the
actual golf cart sitting in your
warehouse and divide that by liabilities
now it goes from two to one to one to
one is ideal
um so it lowers the bar slightly but
this inventory they take out an acid
test ratio just to see what you would
have if something happened to your
entire inventory
um activity ratio second one here the
average collection of period ratio
indicates the average number of days it
takes to convert accounts receivable to
cash why because cash flow is King uh
compare the result to your industry
standards so you need to look at your
competitors and try to get a read on
what their ratio is that way if you say
hey ours is like four to one it should
be two to one like on the previous one
um but everybody in this industry is
four to one then then that's a
justification for being four to one
average collection period account
accounts receivable divided by the
average daily sales so this is how many
sales you're making in the denominator
here and that counts receivables what
you're actually getting so how do you
convert sales into actual funds coming
into the um into the business which then
affects your cash flow which then has
their ability to reinvest in your
business and also pay your people that's
important so they keep showing up so
what is your average collection period
look like the inventory turnover ratio
measures the efficiency of the Venture
in managing and selling uh its inventory
quicker now more quickly a high turnover
rate is a favorable sign so you can take
stuff you've produced put it in the
market get money back how fast you turn
over your inventory so your cost of
goods sold so what you put into them
divided by your your inventory um
um
obviously if you can move things out the
door more quickly you can move dollars
back in the door more quickly and then
your activity ratio actually improves
third category here leverage ratios the
debt ratio assesses the firm's ability
to meet all of its obligations both
short and long term it also measures
risk because the debt consists of a
fixed commitment of interest and
principal payments simple how leveraged
are you uh your debt ratios your total
liabilities what you owe over your total
assets now you preferred this number to
be small right but particularly in the
beginning you can have a potentially a
lot of liabilities if you can get in the
door with convincing someone you have a
winning business idea with your business
plan now over time you want this debt
ratio to go down but debt can be used to
get things done the debt equity ratio
assesses the firm's capital structure it
measures the risk to creditors the more
debt you have the more risky You Are by
considering the funds invested by
creditors that's that and investors
equity you'd love to have you know more
Equity than debt but sometimes that's
not the case
the higher percentage of debt the
greater the risk so again debt to equity
ratio what you owe versus what people
have plowed into the business if people
put more into your business you're more
attractive and less risky
the net profit margin ratio uh
represents the ability
um to translate sales into profits so
how do you how do you get down at the
end of the day use your gross profits uh
instead of net profit to provide another
measure of profitability uh net profit
margin so what do you get to keep as a
business your net profit over your net
sales so how good are you at converting
um what you're doing what you're selling
uh into actual profit in the better the
better you are at this the more profitable
profitable
um you'll be return on investment
measures is the ability to manage the
venture's total investment in assets
substituting stockholders equity for
assets calculates a return on Equity so
your Roi your return on investment is
your net profit divided by your total assets
assets
tell you what the best business plans I
see have these things okay have these
these these ratios or at least take a
stab at it they're going to want to see
it I would like to see it so make this
your stretch goal to include these in
your business plan General evaluation
approaches one widely used approach
assesses the price of comparable
publicly held Securities if one can be
found the present value of future cash
flow adjusts for time value of money in
the business of economic risk think back
to macroeconomics where you learn that
and uh you pray your financial
management class the replacement value
is used for insurance purposes let me
back up if you didn't have a financial
management class or you're coming from a
different industry hopefully you have
someone in your team who can do that if
you have no one on your team you need to
put that under the weaknesses assessment
of your company and how will you address
that by getting someone who's had
financial management and or
macroeconomics again the replacement
value is used only for insurance
purposes so building burns down how do
you replace all your equipment you know
heaven forbid that happens the book
value adjusts for depreciation and
inventory there's some accounting uh the
earnings approach provides the best
estimate of probable return on
investment at the end of the day that's
what people want to know before they
invest in your company be it in debt or
Equity the factor approach uses three
weighted factors to determine value
earnings dividend paying capacity and
Book value the approach given the lowest
value is liquidation values so how fast
you can move
into Cash Holdings so
um that's less important right up front
what's more important is your leverage
and if you're going to be able to
generate enough profit to stay cash solvent
solvent
General evaluation method this approach
determines how much of a company a
venture capitalist will want for a given
investment this approach considers the
time value of money to determine the
Investor's share so the percentage of
the Venture capital's ownership
so how much of the company they're going
to own is determined by their investment um
um
uh divided by or multiplied by the
number of VCS so and then year five
profits ton of price earnings multiple
so the the reading goes into much more
detail here and I don't want to get
bogged down here because I really want
to see these
these
business plan but if you are a VC one
thing you want to consider is the time
value of money to determine your your
share so
when you're here on Shark Tank hey for a
51 stake which is a controlling stake in
the company uh we're asking you for 500
000 you need to figure out if that 500
000 today is going to be more money or
less money in the future if it's less
money in the future you don't do it if
it's more money in the future depending
on the percentage return the return on
investment which we talked about previously
previously
you make the deal
okay it all starts here read more about
this this is really more important from
the venture capitalist perspective than
it is necessarily from where you guys in
this course is coming from in terms of
uh being a an entrepreneur but uh
definitely read more about this
um because what you're gonna be asking
them you're going to be off you're gonna
be wondering how you know what
percentage you're going to offer them
and at what value the general evaluation
method again this slide doesn't do it
enough Justice make sure you're reading
that particular part of the chapter I'll
try to look up and see what page it is
and put it in the um in the notes there
evaluation of an internet company the
valuation process of our early stage
internet company
is different from the traditional
evaluation process this is something
that's more modern day the qualitative
portion of the due diligence carries
more weight than other evaluations
qualitative remember or non-number
there's just a qualitative aspect of hey
well this is just another internet
company will it work what is the value
proposition is it innovating is it
creating a solution for somebody's
problem that people are willing to spend
money on after analyzing the market size
and potential revenues of a company the
investor examines the management team
through a technology firm though a
technology firm may sell for tens of
million dollars it is uncommon generally
speaking they are on average required
for much less the internet people have a
bit of uh success bias here they only
hear about the crazy success stories
they want to hear about the thousands if
not millions of moderate successes to
complete failures the internet and Tech
firms are changing how companies are
funded valuing a company based on Talent
may be growing Trend and one of the that
remains within the tech industry so who
you have matters
but if you don't explain do a good job
in your business plan explaining who you
have and why I should invest in you
because of who you have
you don't get past that first stage we
talked about the previous chapter deal
structure another concern is deal
structure the terms of the transaction
between entrepreneur and the funding
source the needs of the funding source
include required rate of return
timing and reform of return the amount
of control desired in the perception of
the risk involved can you convince them
it's worth the risk entrepreneurs need
to include degree and mechanism of
control like how will the company work
the amount of financing needed why is it
that amount do you have a solid budget
that explains that well hint for your
business plan
uh in the objectives of the firms
um I will add in here I'll give some
bonus points from people who address
human flourishing from a Christian
perspective in the entrepreneurial and
and endeavors
how will your business Advance the
kingdom of God and lead to him and
flourishing through creating value and
Innovation very lightning quick too
quick overview of chapter 12 and formal
risk Capital venture capital and going public
public
look for the notes I'll try to add the
specific section on the venture
capitalist percentage as always
available to your office hours otherwise
Click on any text or timestamp to jump to that moment in the video
Share:
Most transcripts ready in under 5 seconds
One-Click Copy125+ LanguagesSearch ContentJump to Timestamps
Paste YouTube URL
Enter any YouTube video link to get the full transcript
Transcript Extraction Form
Most transcripts ready in under 5 seconds
Get Our Chrome Extension
Get transcripts instantly without leaving YouTube. Install our Chrome extension for one-click access to any video's transcript directly on the watch page.
