Lecture 5Entrepreneurship and Enterprise

Dr Vijay Vyas

Understand 1. The nature of equity gap for small firms2. Importance of venture capital 3. Difference between formal and informal venture

capital4. Process of venture finance 5. Requirements of venture capital companies

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Bank debt the usual option Problems with bank debt

◦ Collateral◦ Risk◦ Short term◦ Repayment pressure◦ Impatient and uncommitted

Size: £50000 to £500,000 (Deakins and Freel, 2003)

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Seed Young Growing MatureStock Market

Institutional investorsRetained Profits

Venture capital Banks

Informal investorsFamily/Friends

Own Capital

Stage Model of Finance

Financial investment in companies which...◦ are unquoted◦ have significant growth potential◦ promise substantial capital gains but◦ are high risk investment

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6

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Cold Contacts Technology scansR

eferralsThe venture capital The venture capital process process

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Asymmetric InformationAsymmetric Information

Adverse Adverse SelectionSelection

Moral HazardMoral Hazard

Institutional venture capital (formal)Min £500,000; Average Over £1 million

Informal (business angels)◦ Market?◦ Competitive?◦ Credible?◦ Potential?◦ Where money would be used?

Corporate venture capital Public sector venture capital

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10

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14

Seed finance (proof of concept funding)

Start-up finance Expansion finance Replacement Capital MBI/MBO

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Thank You