Importance of new venture

financing, types of
ownership securities,
determining ideal debt-
equity mix
es
 Types of ownership securities
• Equity shares
• Preference shares
• Debt securities
• Hybrid securities
 Venture capital
• Venture capital fills the void between sources of funds for innovation (chiefly
corporations, government bodies, and the entrepreneur’s friends and family) and
traditional, lower-cost sources of capital available to ongoing concerns.
• The idea is to invest in a company’s balance sheet and infrastructure until it
reaches a sufficient size and credibility so that it can be sold to a corporation or so
that the institutional public-equity markets can step in and provide liquidity.
• In essence, the venture capitalist buys a stake in an entrepreneur’s idea, nurtures
it for a short period of time, and then exits with the help of an investment banker.
Venture capital
• Venture capital’s niche exists because of the structure and rules of
capital markets. Someone with an idea or a new technology often has
no other institution to turn to.
• Thus bankers will only finance a new business to the extent that there
are hard assets against which to secure the debt. And in today’s
information-based economy, many start-ups have few hard assets.
• The myth is that venture capitalists invest in good people and good
ideas. The reality is that they invest in good industries.
 Types of debt securities
• Bonds, notes and medium-term notes
• Commercial paper (CP)
• Interest-bearing securities
• Zero coupon securities
• High yield securities (non-government)
 Determining ideal debt-equity mix
• The optimal capital structure is estimated by calculating the mix of
debt and equity that minimizes the weighted average cost of capital
(WACC) of a company while maximizing its market value.

• WACC = ke (E/(D+E)) + kd (i-t)(D/(D+E))