1.

Early-Stage Financing and Venture Capital

One day, you and your friends come up with a new idea of a computer software
product. To develop it, you need to hire programmers, buy computers, rent offices. But
you are all students and your assets cannot start up a company. There may be 2 ways
to deal with this situation:
 Go to the bank for a loan
 Get some money from other people. This way is also called OPM (other people's
money)
The 1st way is not feasible. Because banks do not likely to give a start-up company with
no asset a loan.
So the 2nd way may be possible to deal with this situation.
One group of potential investors goes by the name of angel investors, or just angels.
They can be your friends, family, individuals or group of individuals who have invested
in a number of previous ventures.

a. Venture Capital
The term venture capital does not have a precise meaning, but it generally refers to
financing for new, often high-risk, ventures.
3 characteristics of venture capitalist:
 VCs are financial intermediaries that raise funds from outside investors.
 VC firms are typically organized as limited partnerships
 This characteristic separates VCs from angels because angels typically invest
their own money.
 VCs play an active role in overseeing, advising, and monitoring the companies in
which they invest.
 Members of VC firms frequently join the board of directors. The principals of VC
firms usually experienced in business while the enterpreneurs of start-up
companies are knowledgeable about the product, but lack of experience in
business.
 VCs generally do not want to own the investment forever.
 Rather, VCs look for an exit strategy, such as taking the investment public or
selling it to another company.
 This characteristic is determining the nature of typical VC investments.

Page 29 NCVA YEARBOOK 2021

2020 US VC Deals by Sector ($B) DO NOT NEED TO SHOW ON PRESENTATION
Commercial Services $8.7
Consumer Goods&Recreation $4.5
Energy $1.9
HC Devices&Supplies $7.8
HC Services&Systems $11.6
IT Hardware $5.0
Media $3.5
Others $41.1
Pharma&Biotech $28.3
Software $51.6

Show this chart

Venture Capital Investment in 2020

Commercial Services
5% Consumers
Energy Goods&Recreation
1% HC3%Devices&Supplies
5%
Software
31%
HC Services&Systems
7%
IT Hardware
3%
Media
2%

Others
Pharma&Biotech 25%
17%

Source: National Venture Capital Association Yearbook 2021 (Pitchbook Data, Inc)

The figure shows VC investments by industry. As can be seen, a large percentage of

these investments are in high-tech fields. Pharma & Biotech place 2 nd position due to
investor interest in vaccines, antivirals, and companies engaged in the fight against
COVID-19 and the race for a cure. The most famous name may be Moderna, which
produced a COVID-19 vaccine with 94% efficacy

b. Stages of Financing
 Seed money stage
A small amount of money to prove a concept or develop a product.
 Start-up
Funds are likely to pay for marketing and product refinement.
 First-round financing
Additional money to begin sales and manufacturing.
 Second-round financing
Funds earmarked for working capital for a firm that is currently selling its product but still
losing money.
 Third-round financing/ Mezzanine financing
Financing for a firm that is at least breaking even and contemplating expansion.
 Fourth-round financing/ Bridge financing
Financing for a firm that is likely to go public within 6 months.

PAGE 28 NVCA YEARBOOK

 2020 US VC Deals by Stage ($B)
Angel & Seed

Early VC

Late VC

Source: NVCA 2021 Yearbook, Data provided by PitchBook

The figure shows venture capital investments by company stage. The authors of this
figure use a slightly different classification scheme. Seed and Early Stage correspond to
the first two stages above. Later Stage roughly corresponds to Stages 3–6 above. As
can be seen, venture capitalists invest little at the Seed stage.
Why VCs invest little at the Seed stage?
With uncertainty looming around consumer and enterprise sales, public market volatility,
capital availability, and an economic downturn, many VC firms evaluated their portfolios
at the onset of the pandemic and chose to prioritize support for mature, late-stage
companies at the expense of early-stage companies

c. Some venture capital realities

 Large venture capital market, access to venture capital is very limited
 Venture Capitalist rely on informal networks of lawyers, accountants, bankers,
and other venture capitalists to help identify potential investments
 Personal contacts are important in gaining access to the venture capital market
 an “introduction” market
 venture capital is that it is quite expensive
 demand (and get) 40 percent or more of the equity in the company
 hold voting preferred stock
  demand (and get) several seats on the company’s board of directors and may
even appoint one or more members of senior management.

2. The Pubic Issue

The basic steps for issuing securities:
1) Management must obtain permission from the Board of Directors
2) Firm must file a registration statement with the SEC
 This statement contains a financial history, details of the existing business,
proposed financing, and plans for the future.
 Registration statements don’t have to be filed if the loan will mature in less than
nine months or the issue involves less than $5 million
3) The SEC examines the registration during a 20-day waiting period
 A preliminary prospectus, called a red herring, is distributed during the waiting
period
 If there are problems, the company is allowed to amend the registration and the
waiting period starts over
 Securities may not be sold during the waiting period
4) The price is determined on the effective date of the registration
5) Tombstone advertisements are used during and after the waiting period
 contains the name of the issuer
 provides some information about the issue and lists the investment banks (the
underwriters) involved with selling the issue
 In recent years, the use of printed tombstones has declined, in part as a cost-
saving measure.

a. Direct listing
While firms usually use underwriters to help their stock become publicly traded, it is not
required.
If it wishes to do so and meets the requirements of the stock exchange, a company can
do a direct listing.
In this case, the firm arranges for its stock to be listed on the exchange without
marketing and other help from an underwriter.
It is not common for large firms, but music-streaming giant Spotify completed one in
NYSE in 2018
Advantage: It is less expensive because there are no underwriting fees and associated
costs

b. Crowdfunding
5 April 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law.
A provision of this act allows companies to raise money through crowdfunding, which is
the practice of raising small amounts of capital from a large number of people, typically
via the internet

c. ICOS (Initial Coin Offerings)

In addition to sales of traditional debt and equity, a company can raise funds by selling
tokens.
Give the holder the right to use the company’s service in the future.
Token sales occur on digital currency platforms and can be easily transferred on the
platform or converted to U.S. dollars on specialized token exchanges.
This liquidity has made tokens a popular means of funding since their introduction in
2015
The initial sale of a token on a digital currency platform is often called an initial coin
offering or ICO
Many start-up companies are now choosing to raise funding through an ICO rather than
the traditional venture capital channels
most popular among companies that are building services based on blockchain
technology

3. Alternative Issue Methods

 ISSUE NEW
SECURITIES

PUBLIC ISSUE PRIVATE ISSUE

firm is required to the issue is sold to fewer than 35

register the issue with investors
the SEC
registration statement is not
required

GENERAL CASH RIGHTS OFFER

OFFER

A company’s first public equity issue is referred to as an initial public offering (IPO)
All initial public offerings are cash offers

A seasoned equity offering (SEO) refers to a new issue where the company’s securities
have been previously issued
May be made by either a cash offer or a rights offer