Venture Capital Case Study

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Register to read the introduction… Venture firms “syndicate” a large investment. That is, they will attempt to interest other firms in taking a piece of the investment. This permits the firm to invest in a larger number of companies, and thus spread its risk. This is particularly important on subsequent “rounds” or stages of financing.
Other venture firms will want to see that the original firm(s) will continue their investment in the company. If existing, more knowledgeable investors aren’t interested in the company, why should a new venture firm be interested?
The amount of venture capital financing rose dramatically in the 1990s. From approximately $7.8 billion invested in 1995 to $106 billion in 2000, back down to $22 billion in 2005.6 (See Exhibit 1 for investment patterns 1990-2004).
As the amount of venture capital invested grew in the late 1990s, the number of companies funded with VC grew as well, but at a much slower pace. The result was a dramatic increase in the amount of financing per company (see Table B below).
Table B Venture Capital Investments 1990-2000 ($million)

Year
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Real estate: Mortgage financing is usually readily available to finance a company’s plant or buildings; 75% to 85% of the value of the building is a typical figure.



Personally secured loans: A business can obtain large amounts of financing if one of its principals (or someone else) is willing to pledge a sufficient amount of assets to guarantee the loan. •

Letter-of-Credit financing: A letter of credit is a bank guarantee which a company can obtain to enable it to purchase goods. A letter of credit functions almost like a credit card, allowing businesses to make commitments and purchases in other parts of the world where the company does not have relationships with local banks.



Government Secured Loans: Certain government agencies will guarantee loans to allow businesses to obtain financing when they could not obtain it on their own. The Small Business
Administration, the Farmers Home Administration, and other government agencies will guarantee bank loans.

Asset-based financing is available from commercial banks and other financial institutions.
Insurance companies, pension funds, and commercial finance companies provide mortgages

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