Acquisition/Buyout
It is favored by venture capitalist as it offers higher rewards in shorter period with lower risk. Funds are needed for new or larger factories and warehouses, production capacities, developing improved or new products, developing new markets or entering exports by enterprise with established business that has already achieved break even and has started making profits.
A company in this stage has advanced operations and is prepared to acquire another competing company as a subsidiary, or expand into new markets and products with the purchase of an existing company. To make acquisition happen, high interest "Junk Bonds" may be used, or substantial debt from banks. Monies for this type of capital can range from $3 million up to $20 million. Sometimes investors apply to Leveraged Buyout (LBO) when funds are provided to enable a management group to acquire a product line or business from a public or private company. Revitalized management may have as little as 1% of their own money invested.
Ex.1. Comment on the following scheme:
Writing
Analyze the table below and write an essay under the heading “Venture capital firms vs Business Angels. Pros and cons”. Follow the structure of a good essay: introduction, the main body (3-4 paragraphs) and the conclusion. Use the topic sentence to introduce the subject of each paragraph; write well-developed paragraphs, giving reasons/examples; use sequencing (e. g. Firstly, Secondly, etc) and linking words (e. g. however, although); make references to other sources and use quotations. Make use of the linking words that follow:
To add more points to the same topic |
In addition (to this), furthermore, moreover, besides, apart from, what is more, as well as, not to mention (the fact) that, also, not only ..., but, also/as well, both … and, There is another side to the issue/question/argument of… |
To express cause |
Since/because, in view of/because of/owing to/due to (the fact that)…, the reason that… |
To express effect |
Thus/therefore/so/consequently, the result of … would be,/this would result in… |
To express purpose |
So as/in order (not) to…, with the purpose of/intention of (+ing) |
Angel investors vs Venture Capitalists
Differences |
Angel Investors |
Venture Capitalists |
Experience |
invest five years or more; have entrepreneurial experience; provide “hands-on” guidance to early-stage companies. |
have a decade or more experience; provide their own associate staffing to ensure their investment. |
Money source |
private investor- uses his own personal money to fund their investments. |
professional money manager- they pool capital from other sources, such as pension funds and university endowments. |
Investment amount |
$50,000 to $1 500,000 |
$1 500,000 to $5+ million |
Investment time |
3-7 years |
5-7 years |
System for analyzing and managing investments |
• act solely as individual investors, many have professional investment experience, and bring considerable industry knowledge to an entrepreneur and management team. • have a practical, hands-on approach to building a company and are willing to work within the structure that the founders have put together. |
• have a formalized approach to investing: employ a team of human capital to maximize profit and growth potential (consultants/ associates who are specifically involved in due diligence on potential deals; network of investment bankers and others to provide additional sources of financing for their portfolio companies). • VCs have more financial, due diligence, and valuation skills. • have “hands-off” experience. |
Strategy and approaches for reasonable return |
• risky approach to investing- believes in early-stage investment (seed and start-up stages) strategy in which they can receive more slower and modest returns over their entire portfolio. • angels are involved in company’s earliest stages because more equity is available at a lower price and there is an opportunity to shape the strategy and development of the business. |
• conservative approach to investing- VCs invest in all stages of a company; they believe in the “home run theory” of investing, in which later-stage companies (mature, high market capital companies) will minimize their risk of loss. |
Amount of control |
play an advisory role for company founder and management team |
require one or more board positions to gain control of corporate decisions |
Requirements for investing |
provide the initial funding of small amounts (up to 1,5 million dollars) for a company, even before the company has demonstrated any kind of success; however, the company must show considerable potential for growth. |
provide millions of dollars per investment; however, VC’s invest in companies with a proven track-record of business success. The company must gain $25 million in gross revenue potential from their unique product or service before the investment. |
Reasons for investing |
financial return, social responsibility, and community involvement |
maximize investor returns and outperform other venture funds |
National recognition |
No. There is no national directory for active angel investors. |
Yes. VC’s advertise their location. There are many extensive directories listing active venture capitalists. |
Industry and portfolio |
Found in all industries, including technology, pharmaceutical, publishing, insurance, finance, etc., and have diversified portfolios. |
Involved in limited industries (mostly technology), and have limited portfolios. |
Follow-on investment |
Rarely- angels tend to avoid follow-on investing because of the risk of losing more money. |
Yes- they will re-invest/put in additional amounts of capital at later stages to assist with growth |
Investment Consequence |
Angel investors believe in the entrepreneur and invest in them as a person. |
VCs are less emotional and are more process involved; they mainly evaluate deals and make offers. |