Examples of venture capital in the following topics:
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- Venture capital is a method of financing a business start-up in exchange for an equity stake in the firm.
- Due to their risky nature, most venture capital investments are done with pooled investment vehicles.
- These characteristics usually best fit companies in high-tech industries, which explains the venture capital boom of the late 1990s.
- The technology firms of Silicon Valley and Menlo Park were primarily funded by venture capital.
- Facebook is one example of a entrepreneurial idea that benefited from venture capital financing.
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- Venture capital (abbreviated as VC) is an attractive funding option for young companies with high growth potential, most often in high technology industries.
- Obtaining venture capital is different from raising debt or a loan from a lender.
- Start-up: VC firms provide capital to early stage firms that need funding for marketing and product development.
- Second-Round: Early-stage companies that are selling product but not yet turning a profit receive working capital.
- The venture capital firm pools capital from investors and allocates it to venture efforts deemed worthy of investment.
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- Advantages: The primary advantage of venture capital financing is an ability for company expansion that would not be possible through bank loans or other methods.
- In addition to financial capital, venture capitalists provide valuable expertise, advice and industry connections.
- A stipulation of many VC deals includes appointing a venture capitalist as a member of the company's board.
- Venture capital is also associated with job creation (accounting for 2% of US GDP), the knowledge economy, and used as a proxy measure of innovation within an economic sector or geography.
- Pursuing venture capital financing may not be appropriate for most start-up companies.
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- One of the main functions of financial markets is to allocate capital, matching those who have capital to those who need it.
- One of the main functions of financial markets is to allocate capital.
- Capital markets especially facilitate the raising of capital while money markets facilitate the transfer of liquidity, matching those who have capital to those who need it.
- When a company borrows from the primary capital markets, often the purpose is to invest in additional physical capital goods, which will be used to help increase its income.
- Long-term capital can come in the form of shared capital, mortgage loans, and venture capital, among other types.
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- At the end of the first quarter, the investor had capital of $1,010.00, which then earned $10.10 during the second quarter.
- Another approach to choosing the discount rate factor is to decide the rate that the capital needed for the project could return if invested in an alternative venture.
- When analyzing projects in a capital constrained environment, it may be appropriate to use the reinvestment rate, rather than the firm's weighted average cost of capital as the discount factor.
- It reflects opportunity cost of investment, rather than the possibly lower cost of capital.
- This makes IRR a suitable (and popular) choice for analyzing venture capital and other private equity investments, as these strategies usually require several cash investments throughout the project, but only see one cash outflow at the end of the project (e.g., via IPO or M&A).
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- A firm's weighted average cost of capital after tax (WACC) is often used.
- Another approach to selecting the discount rate factor is to decide the rate that the capital needed for the project could return if invested in an alternative venture.
- If, for example, the capital required for Project A can earn 5% elsewhere, use this discount rate in the NPV calculation to allow a direct comparison to be made between Project A and the alternative.
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- Initial public offerings are a primary and potentially lucrative means of exit from investment for venture capitalists.
- If the company was venture-backed, the VC firms often gain their returns from IPO yields.
- Enabling cheaper access to capital, which is particularly important for high growth companies
- Prior to agreeing to provide capital, venture capitalists contract for privileges including "registration rights", which ensure their ability to sell shares into the public capital markets, thereby safeguarding their future returns.
- The registration rights agreement between the company and the venture capitalists requires the company to register the offering of shares by venture capitalists under certain conditions.
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- The WACC is the cost of capital taking into account the weights of each component of a company's capital structure.
- The weighted average cost of capital (WACC) is the rate a company is expected to pay, on average, to its security holders.
- The WACC is also the benchmark rate, or the minimum rate of return, a company must earn on a new venture in order to make the investment worthwhile.
- Stated differently, the return on capital of a new project must be greater than the weighted average cost of capital.
- Since companies raise money using any number and combination of these sources - i.e. debt, common stock, preferred stock, retained earnings - it is important to calculate the cost of capital taking into account the relative weights of each component of a company's capital structure.
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- The weighted average cost of capital is the minimum return that a company must earn on an existing asset base.
- However, some new ventures will require taking on risks outside of the company's current scope.
- This will increase the risk premium on the project and its cost of equity and subsequently the weighted average cost of capital.
- This increase in cost of capital will devalue the company's stock, unless this increase was offset by a higher expected rate of return.
- Describe how individual projects can alter a company's WACC of capital