• Process + VC FAQ

    Process + VC FAQ

    Learn the VC rules

Investment process step by step

Proces - infografika
Proces - infografika

1. Glossary

Due diligence

Source: http://www.psik.org.pl/slowniczek.html

In-depth analysis and assessment of all the operational areas of a company targeted for investment by a private equity / venture capital fund.

Exit or divestment

Exit or divestment takes place when a private equity / venture capital fund sells securities it holds in a company. Exit methods include:

  • trade sale
  • sale by public offering (including IPO)
  • sale to another private equity / venture capital fund
  • sale to a financial institution
  • retiring shares by a company and paying the investor for the retired shares
  • company liquidation

Expansion capital – financing stage

Financing provided for the growth and expansion of a company before and after it reaches the break-even point. The capital may be used to finance increased production capacity, develop the market and product, and provide additional working capital.

Start-up – financing stage

Financing provided to companies for product development and initial marketing. This applies to companies that are being set up or have been in business for a short time, but have not sold their product commercially.

Seed – financing stage

Financing of initial, potentially profitable concepts before setting up a company. Assets are usually provided to research, assess and develop a concept until it reaches the commercial stage.

2. Why PE/VC?

Source: http://www.psik.org.pl/dlaczego-pevc.html

A VC investor becomes a shareholder, thus taking on the investment risk together with other shareholders in a company.

The investor's aims are identical with those of other shareholders and the management, i.e. to see the company grow and to increase its value within a few years. The VC investor achieves this and earns money by leveraging their experience and know-how to ensure growth in value of the company's shares. The VC investor carefully calculates the risk but is also prepared to invest in companies that would be refused bank financing. Venture capital financing does not entail any interest payments. The VC Fund earns only when other shareholders in the company earn – when the value of the company's shares increases.

3. What is growth capital?

Source: http://www.investopedia.com/terms/c/capital-growth.asp

Capital growth is the increase in value of an asset or investment over time.

Capital growth is measured on the basis of the current value of the asset or investment, in relation to the amount originally invested in it. Capital growth is one of the most fundamental investment objectives for investors. It generally connotes a higher appetite for risk as opposed to an income objective, which may denote lower risk tolerance. Capital growth can also be classified into moderate growth and high growth. In the equity realm, the former would include blue chips while the latter would encompass speculative investments. Also known as capital appreciation.

4. What documents should I prepare?

Source: http://technologie.gazeta.pl/internet/1,104665,10107192,Jak_uwiesc_inwestora____dokumentami.html

A document known as a "teaser" and provided by a start-up company serves a similar purpose.

In both cases, the information that the documents contain is a summary of a professional business plan. The document includes:

  • a summary of the venture
  • the issue you want to solve and your proposed solution
  • business model, income sources and forecasts
  • sales and marketing
  • competition and your competitive advantage
  • team
  • current product development status with a prototype if available
  • main risk factors
  • value of investment and capital sought

5. What is EBITDA?

Source: http://www.private-equity.pl/co-to-jest-ebitda.php

EBITDA stands for "earnings before interest, taxes, depreciation and amortization".

EBITDA reflects a company's general operating profitability, which includes the company's profit from core business operations and other business operations before interest, income tax, depreciation and amortization of tangible and intangible assets (WNiP) costs are subtracted.

EBITDA equals EBIT plus amortization and depreciation of tangible and intangible assets

 

6. Market size estimation

Source: http://www.private-equity.pl/top-down-i-bottom-up-czyli-szacowanie-wielkosci-rynku-docelowego-firmy.php

A company that intends to estimate its target market size can follow one of the two main approaches:

  • Top-down

The top-down approach starts with a very general analysis of the target market, e.g. on a global, regional or national level [...]. In most cases, the company does not have access to market data concerning a single product or service, which means that it will have to conduct the analysis on its own.

  • Bottom-up

Let's consider the situation of a "fair-trade" coffee supplier assuming that it can sell coffee only to particular types of cafés and shops which amount to around 12,000 in Poland. The supplier also assumes that only 50% of those will agree to enter into a partnership. Next, after performing market analysis, the supplier makes further assumptions regarding the average amount of coffee that is sold by different types of retailers (shops or cafés), location of retailers, seasonal factors, unit price, etc. After taking a number of such assumptions into account, the supplier is able to estimate the amount of coffee that can be sold each month and the revenue the company will be able to generate.

7. Pre- and post-money valuation

Source: http://www.investopedia.com/ask/answers/114.asp

Pre-money refers to a company’s value before it receives outside financing or the latest round of financing, while post-money refers to its value after it gets outside funds or its latest capital injection.

Suppose that an investor is looking to invest in a hi-tech startup. The entrepreneur and the investor both agree that the company is worth $1 million and the investor will put in $250,000.

The ownership percentages will depend on whether this is a $1 million pre-money or post-money valuation. If the $1 million valuation is pre-money, the company is valued at $1 million before the investment and after investment will be valued at $1.25 million. If the $1 million valuation takes into consideration the $250,000 investment, it is referred to as post-money.

8. What is NDA?

Source: http://www.investopedia.com/terms/n/nda.asp

A non-disclosure agreement (NDA) is a legal contract between two or more parties that signifies a confidential relationship exists between the parties involved.

The confidential relationship often will refer to information that is to be shared between the parties but should not be made available to the general public.

9. Private equity and innovation

Source: Frontier Economics, Exploring the impact of private equity on economic growth in Europe, Maj 2013, str. 50

In relation to the first of these, a positive outcome of private equity activity derives from the influence that improved management has on promoting greater innovation.

Private equity firms foster innovation and successful patenting: directly, by allocating more funds to research and development for new products and processes
in the investee companies, and indirectly, by supporting start-up young firms, which tend to be more innovative than the average firm. These activities
lead to significant uplift in European innovation:

  • Estimates show that, in some sectors, €1 of private equity finance can be up to nine times more effective in patent production than €1 of non-private equity finance on patent production.
  • The patents granted to private equitybacked firms over five years to 2011 are worth up to €350bn, or twice the total amount of private equity investment during the same period.
  • It is estimated that private equity-backed enterprises account for up to 12% (ca. 116,000) of total patents across 12 European countries. And it is estimated that the average economic
    value of a patent is €3m.

Link:  http://www.frontier-economics.com/documents/2014/04/exploring-the-impact-of-private-equity-on-economic-growth-in-europe-frontier-report.pdf

10. Helping firms internationalise

Source: Frontier Economics, Exploring the impact of private equity on economic growth in Europe, Maj 2013, str. 46

There is extensive academic evidence emphasising that smaller and newer firms may face problems in internationalising due to lack of human capital or funding.

Private equity firms can play a significant role in helping investee companies to overcome these hurdles in two key respects.

  • Firstly, private equity firms’ active participation in the management of investee companies can provide both strategic and operational guidance on entering foreign markets.
  • Secondly, they provide additional funding for internationalisation efforts.

Given the importance of internationalisation in a globalised economy, it is perhaps surprising that limited attention has been directed towards private equity investors’
role in the internationalisation efforts of portfolio companies to date. However, a selection of studies and evidence points to a number of impacts that private equity has
on businesses in introducing pre-conditions that are fundamental to internationalise effectively.

Link: http://www.frontier-economics.com/documents/2014/04/exploring-the-impact-of-private-equity-on-economic-growth-in-europe-frontier-report.pdf

11. VC and PE Funds Do Build Businesses

Source: http://graziadiovoice.pepperdine.edu/vc-and-pe-funds-do-build-businesses-says-new-pepperdine-study/

A new study by Graziadio School professors John Paglia andAugus Maretno Harjoto looked at the effects of private equity and venture capital financing among just over 6,800 small and mid-size business establishments from 1995 to 2009 to find that, after a financing event:

  • Private equity-backed establishments generated 129% more revenue growth and 257% more employment growth than their non-PE backed counterpart, and
  • Venture capital-backed companies generated 846% more revenue growth and 608% more employment growth than their non-VC backed counterparts.

At the same time, the study reveals that minority, female, and foreign owners are less likely to receive PE financing (12.6%, 3.6%, and 38.8%, respectively) as well as VC financing (34.7%, 22.5%, and 45.6%).

12. Exploring the success of VC backed companies

Source:http://www.bvca.co.uk/ResearchPublications/ResearchReports/ExploringthesuccessofVCbackedcompanies.aspx

The report produced by Experian for the BVCA – tracked the performance of a sample of companies backed by venture capital (VC) since 2006, and compared it with a benchmark sample of comparable companies, based on size and sector.

Key findings include:

  • Venture capital-backed businesses showed stronger turnover growth between 2006 and 2010 than other enterprises, with VC-backed companies trebling sales compared with more modest growth at comparable companies. Profit growth was also stronger at VC-backed businesses.
  • Job creation was also much stronger within VC-backed companies, with an 80% rise in employment over the four year sample period. In comparison, other enterprises saw very little change in overall employment numbers.
  • Overall, gross profit margin at VC-backed companies was broadly comparable with other enterprises. Turnover per employee – a proxy for productivity – was also broadly similar over the sample period as a whole.

Adam Swash, Head of Strategy and Research at Experian, said: "This report shows the impact venture capital can have and shows the importance of venture capital has for the future growth of UK plc."

Full report: http://www.bvca.co.uk/Portals/0/library/Files/News/2012/2012_0006_experian.pdf

13. Six Classic Ways to Crash Your Company

Source: http://www.inc.com/magazine/201209/kimberly-weisul/speed-traps-managing-fast-growth.html

Every fast-growth company eventually runs into at least one of these all-too-common obstacles. How you handle them can make the difference between success and high-speed smashup.

What kinds of obstacles do fast-growth companies encounter? Gary Kunkle, an economist and research fellow at the Edward Lowe Foundation’s Institute for Exceptional Growth Companies, has long wondered the same thing. To get deeper inside what makes successful (and unsuccessful) businesses tick, Kunkle has constructed a vast database of some 45 million workplaces. He has collected more than 250 data points on each of those companies and can sort them by more than 400 factors, such as industry, size, and location.

We asked Kunkle to help us identify the challenges that all fast-growing businesses face. They’re listed below, along with case studies showing how current Inc. 500 entrepreneurs managed to overcome them. If you plan to join the Inc. 500, you can expect to encounter these traps, too. The secret is not to let them slow you down.

  • 1. Your Business Outgrows Its Staff
  • 2. You Wait Too Long to Hire
  • 3. Your Business Lacks the Right Systems
  • 4. You Run Out of Money
  • 5. You Can’t Keep Up With Demand
  • 6. The Problem Is You

A co-financed project

The project is co-financed by Switzerland under the Swiss programme of cooperation with the new EU member states.

www.programszwajcarski.gov.pl

ikony swiss

Experior Venture Fund was co-founded by Krajowy Fundusz Kapitałowy (the National Capital Fund).

www.kfk.org.pl

Krajowy Fundusz Kapitałowy

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