Search newspapers, magazines, or the web (NVCA site), and identify a venture whi

Question

Search newspapers, magazines, or the web (NVCA site), and identify a venture which has just received initial venture capital funding. Think about the value proposition written by the entrepreneurs to obtain the funding for this product or service opportunity. In a two- to three-page paper (not including the title and reference pages), address the following: Identify a venture that has received initial funding and describe the value proposition and investment requirements. Explain key points that you believe resulted in a positive evaluation of the venture and convinced investors to provide funding. Be sure to include examples to support your explanation.

Explanation / Answer

Venture Capital

Venture capital refers to nancing that comes from companies or individuals in the business of investing in young, privately held businesses. They provide capital to young businesses in exchange for an ownership share of the business. Venture capital rms usually don’t want to participate in the initial nancing of a business unless the company has management with a proven track record. Generally, they prefer to invest in companies that have received signicant equity investments from the founders and are already protable.

They also prefer businesses that have a competitive advantage or a strong value proposition in the form of a patent, a proven demand for the product, or a very special (and protectable) idea. Venture capital investors often take a hands-on approach to their investments, requiring representation on the board of directors and sometimes the hiring of managers. Venture capital investors can provide valuable guid­ance and business advice. However, they are looking for substantial returns on their investments and their objectives may be at cross purposes with those of the founders. They are often focused on short-term gain.

Venture capital rms are usually focused on creating an investment portfolio of businesses with high-growth potential resulting in high rates of returns. These businesses are often high-risk investments. They may look for annual returns of 25 to 30 percent on their overall investment portfolio.

Because these are usually high-risk business investments, they want investments with expected returns of 50 percent or more. Assuming that some business investments will return 50 percent or more while others will fail, it is hoped that the overall portfolio will return 25 to 30 percent.

More specically, many venture capitalists subscribe to the 2-6-2 rule of thumb. This means that typically two investments will yield high returns, six will yield moderate returns (or just return their original investment), and two will fail.

Recent Example=

Goldman Sachs invests $450 million and DST invests $50 million, putting Facebook’s valuation at $50 billion, a new high. (Goldman plans to raise up to $1.5 billion more to sink into Facebook, from its high-net-worth clients.) Moskowitz reportedly sells a substantial number of shares on the secondary market. The social network now reports more than 600 million active users.

Cumulative funds raised, excluding loans: $1.3 billion. With Facebook sitting on $2 billion in the bank after raising $1.3 billion, the total return on investment, if crudely calculated for today alone, would be 53.8%. Of course, large, later rounds of funding have allowed early investors and employees to cash out at ROIs far greater than 53.8%. The number is only worth noting since Facebook is often mentioned in tech circles in the same breath as Google   which has a whopping $34 billion in cash reserves right now.

Facebook, in other words, will have to grow its business several times over, and perhaps become an even larger company (it has roughly 2,000 employees now, to Google’s nearly 20,000) to book that kind of income. Goldman Sachs and its investors are hoping, then, that they’re right in thinking a $50 billion valuation and two-year lock-in for Facebook shares will, in 2013, look like the bargain DST got with its investment at a $10 billion valuation in 2009.

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