What is venture capital financing?
Equity investments by investors in private companies
What are the expected returns on venture capital investments?
20%-50% return. The earlier the stage the investor gets in, the higher the risk and return
Who are the four main players in venture capital?
Entrepreneurs, investors, investment bankers, and venture capitalists
What are the four parts of funding venture capital?
Seed/tartup funding
First Round: A round
Intermediate/Second Round: B Round
Later Stage Funding: C-Round
What is seed/startup funding?
-Earliest stage, typically no operating history
-"Angels"
-Most Risky
-Crowd Funding
-Investment is based on a business plan, the management group backgrounds along with the market and financial projections
What are Angels?
-Private investor providing initial funding for a new company
What is crowd funding?
The collective effort of individuals who network and pool their money to support business efforts
What is First Round Funding: A Round
Typically funding that accommodates growth. Company may have finished R&D. Funding is often in the form of convertible bond
What is Intermediate/Second Round Funding: B Round
Maturing company where a future leveraged buyout, merger, or acquisition and/or initial public offering is a viable option
What is Later Stage Funding: C Round
Mature company where a funds are needed to support major expansion or new product development. Company is profitable or breakeven.
What is an equity loan?
Offer of an ownership position to induce the loan or can be a note that has the option to convert from debt to equity
What is Mezzanine funding?
Company's progress makes positioning for an initial public offering available. Venture funds are used to support the IPO.
What are the primary roles/goals of the SEC?
SEC as a regulator
1. Protect investors
2. Information disclosure
3. Operational and pricing efficiency of securities markets
4. Fair and orderly markets
What does the SEC oversee?
Issuers, investment firms, investors, markets
Procedural Elements of the SEC
Rules and regulations
Enforcement Action
Provide for full and fair disclosure of information (quarterly and annual reports)
What is the 10-K report?
Annual report provided to investors
What are the responsibilities that the SEC deals with?
Rating Agency Actions
Ponzi Schemes
Financial Crisis (trying to fix it)
Insider Trading
-Objective: Create a level playing field
Rule 14e-3: Investors cannot act on non-public information
What is Rule 14e-3?
A rule stating that investors cannot act on non-public information
The type of information covered by insider trading laws is
Purposely not well defined
Legal Insider Trading
-Trading by corporate insiders who have non-public information
-Permissible (outside of certain dates) and a sign of insider confidence in the company
-Executives can buy/sell their own stock through prearranged "10b5-1" trading plans
-Some research shows
Illegal Insider Trading
-Trading with "material, non-public information"
-Do not have to be an insider
-Information is not well defined - gray areas
-Monitoring has become better
What are some examples of insider trading?
Nvidia- Heard they got a contract with x-box, went out and bought their stock before the release of the information
Martha Stewart- Got insider info from InClone systems to sell her stock because it was going to fail, made her money then lied to SEC about
Elliot Spitzer (former Attorney General of New York) as Market Regulator
Wall Street Analysts: Settlement with major brokerage firms for tainted research
Mutual Funds: Settlements with major investment companies who allowed favored customers to execute 'market timing' trades
Replaced by B. Lawsky
What is an IPO?
The initial sale of common stock to the public by a company
What is evident of the average first day return of an IPO?
Since it is only 15%, it means that it is under priced
What is the Winners Curse?
The average investor does not get the first day return because investment banks allocate hot IPOS to biggest investors
What is the long-term (3 year) adjusted performance of IPOs?
Negative
Why go public?
Capital to execute business plan
Liquidity for owners
Marketing and Branding Opportunity
Capital Market Access
Who has had the biggest IPO in recent years?
China
What are the roles of an investment banker in the primary securities markets?
Advising
Origination (Securities Act of 1933)
-Due diligence, registration statement, prospectus
Syndicate formation, underwriting, and price stabilization
Origination (securities act of 1933)
Due Diligence, registration statement, prospectus
S-1 Registration Statement.
-Company, management, products/services and markets, financial condition, ownership, use of capital
Anatomy of a Deal
1. Approval from Board of Directors
2. Due Diligence, advising, road shows, and feasibility studies
3. Registration with SEC, 20-day waiting period
a. Red Herring: Preliminary Prospectus
b. Tombstone: Issue Advertisements
c. Green Shoe: Underwriter option
Red Herring
Preliminary Prospectus
Tombstone
Issue Advertisements
Green Shoe
Underwriter option to sell 15% more shares
Negotiation offerings
Underwriting, best efforts and stand-by offerings
What is the role of the primary securities market?
Source of capital
What is the role of the secondary securities market?
Liquidity for primary market
Price determination
Dollar General Case Study
DG owned by two hedge funds from 2007-2009
Spread: Underwriting discount/proceeds before expenses
Green Shoe Option: If they do a good job selling it, they can sell more
IPO Hall of Fame
Internet IPO Frenzy: First day returns were often huge
Web Methods: End-of-first day price was up 508%
Venture Backed IPOS do better than non-venture backed IPOS
-VC firms invest in best businesses and create opportunities
Key Statistics: IPOS performance
What is a seasoned/secondary offering?
A sale of new common stock by an already public company
What is the average return of a secondary offering at the announcement?
-3%
Prices go down because investors take it as a signal that the shares are overpriced
How does Danny Devito value Shares?
The value of assets minus liabilities