Deck 8: Sources of Capital for Entrepreneurial Ventures

Question 1

What are some of the advantages of going public? What are some of the disadvantages?

Answer 1

Going public:
Going public is termed as when a corporation can raise capital by selling securities in the public markets. This occurs when a privately held company issues shares of stock to the public. It is also termed as public offerings.
Following are the advantages of going public:
• Liquidity: The public market offers liquidity for the owners, because they can sell their stock immediately in the market to increase capital.
• Value: The market place value of the company's stock can value potential offerings of the company.
• Range of capital amount: The primary benefit for a business to increase capital is by selling securities. Size of capital can be enlarged by selling the securities in a short span of time.
• Image: The image of publicly traded corporation often is stronger in the eyes of financiers, customers, and suppliers.
Following are the disadvantages of going public:
• Disclosure: Every company's offering must be made to the public to determine the value of the securities in the current market. So, detailed disclosures on the company's affairs are required in order to increase capital of the new venture.
• Costs: This process is expensive and certain companies cannot afford. As compared with other capital public offerings is costlier. The different kinds of expenses involved are accounting fee, legal fees, and other cost on underwritings.
• Requirements: There is different paperwork involved with the "State Securities and exchange commission" (SEC) for the betterment of the company. These formalities requirement needs lots of time which can make delay in raising the offerings.
• Shareholder pressures: There are many management decisions which are short term in nature to maintain a good performance record for dividends and earnings of the shareholders. So, these kinds of pressure can lead to a failure to give adequate consideration to the company's long-term improvement and growth.

Question 2

What is the objective of Regulation D?

Answer 2

Regulation D:
Regulation D consists of rules offering exceptions to the registration requisites, which allow organizations' securities to offer and sell in the stock market. These exemption rules help the organizations to sell stocks without registering with "State Securities and Exchange Commission" (SEC).
Following are the objectives of Regulation D:
• The main objective is to make selling process easier and helps to reduce the cost related to offering and selling securities of small ventures.
• Regulation D helps the entrepreneur in funding faster and avoid the costs associated with public offerings.
• This regulation allows entrepreneurs to raise source of capital without registering in SEC.
• It permits the organizations, to sell their stocks in SEC without registering.

Question 3

If a person inherited $100,000 and decided to buy stock in a new venture through a private placement, how would Regulation D affect this investor?

Answer 3

Regulation D:
Regulation D consists of rules offering exemptions to the registration requisites which allow organizations' securities to offer and sell in the stock market. These exemption rules help the organizations to sell stocks without registering with "State Securities and exchange commission" (SEC).
Following are the ways Regulation D that affect the investor:
As per the Regulation D, there is certain exemption made for buying stock in new venture through a private placement. The SEC provides that Regulation D is allowed only for small firms to purchase and sell stocks. One of the rules under the exemptions states that no specific disclosure or information requirement is necessary for the purchase of stock. This rule on the private placement is an alternative means of raising capital for a new venture. This source is often available to entrepreneur who seeks venture capital in amount of less than $500,000.
Here, the person buys stock for $100,000 which is less than $500,000 and no specific disclosure required. Therefore, as per the exemption of Regulation D, it has an effect on the investors buy stock for $100,000.

Question 4

Is it easier or more difficult to get new-venture financing today? Why?

Question 5

Some entrepreneurs do not like to seek new-venture financing because they feel that venture capitalists are greedy. In your opinion, is this true? Do these capitalists want too much?

Question 6

Identify and describe three objectives of venture capitalists.

Question 7

How would a venture capitalist use Figure 8.2 to evaluate an investment? Use an illustration in your answer.

Question 8

Identify and describe four of the most common criteria venture capitalists use to evaluate a proposal.

Question 9

In a new-venture evaluation, what are the four stages through which a proposal typically goes? Describe each in detail.

Question 10

An entrepreneur is in the process of contacting three different venture capitalists and asking each to evaluate her new business proposal. What questions should she be able to answer about each of the three?

Question 11

An entrepreneur of a new venture has had no success in getting financing from formal venture capitalists. He now has decided to turn to the informal risk capital market. Who is in this market? How would you recommend that the entrepreneur contact these individuals?

Question 12

Using Figure 8.1, describe some of the sources of capital available to entrepreneurs, and discuss how they correlate to the varying levels of risk involved with each stage of the venture.

Question 13

What are the benefits and drawbacks of equity and of debt financing? Briefly discuss both.

Question 14

If a new venture has its choice between long-term debt and equity financing, which would you recommend? Why?

Question 15

Why would a venture capitalist be more interested in buying a convertible debenture for $500,000 than in lending the new business $500,000 at a 4 percent interest rate?