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BFINEL1X: ELECTIVE 1

Dr. Jay-Ar C. Dimaculangan, CHRP, AEPP, AWP, MIEE,

LPT
Introduction to
Venture Capital (VC)
and Private Equity
(PE)
Learning Outcomes

• Differentiate, and discuss the need and role of

Venture Capital and Private Equity.
Sub-topics

• Venture Capital Cycle

• The Capital Gap
• State of the Philippine VC/ PE Industry
The Nature and History of Venture Capital
• The venture capitalists’ role is an old one
• Entrepreneurs have long had ideas that require
substantial capital to implement but lacked the
funds to finance these projects themselves.
• While many entrepreneurs have used bank loans or
other sources of debt financing, start up companies
that lacked substantial assets, expected several
years of negative earnings, and had uncertain
financial growth found it difficult to get
financing.
 The Nature and History of Venture Capital
• Hence, due to the non- availability of
collaterals/tangible assets, a
convincing financial position and
profitability status, raising debt from
conventional sources of financing like
banks and financial institutions
becomes difficult for them.
The Nature and History of Venture Capital
• Thus, venture capital and private equity
emerged as an alternative source of finance to fill the
gaps of conventional financing mechanism and
promote innovative entrepreneurship.
• It evolved as a source of funding available for
investment in small and medium enterprises for
new entrepreneurs setting up ventures, which are
typically technology based and risky in nature but
have the potential to develop into major economic
contributors of the country
The Nature and History of Venture Capital

• Also known as ‘risky capital’, venture capital

developed as a source of funding available for early-
stage financing of new and young enterprises
which have attractive growth prospects
The Nature and History of Venture Capital
• Venture Capital originally evolved in USA and developed
enormously across the other parts of the world during the
second half of the seventies.

• Venture capital which involves early-stage financing was an

important feature of the US venture capital industry whereas
Europe had an established financial specialty in private equity
financing which involves late -stage financing. Other than the
developed countries of USA, Europe and UK venture capital
financing grew gradually across many developing countries.
The Nature and History of Venture Capital

• The contribution of venture capital financing to fill

the gaps in the conventional financial system by
providing funding to new entrepreneurs and helping
them to commercialize new technologies over a
period of time led to the growth of the small and
medium enterprises in the various sectors of the
economy across the world.
 Venture Capital Defined.
• Jane Koloski Morris, editor of the well-known
industry publication; Venture Economics, defined
venture capital as providing seed, start up and
first stage financing and also funding the
expansion of companies that have already
demonstrated their business potential but do not
yet have access to the public securities market or
to credit oriented institutional funding sources
 Venture Capital Defined.
• represents a financial investment, in the form of equity,
quasi-equity and sometimes debt-straight or conditional
(i.e., interest and principal payable when the venture starts
generating sales)
• made in new untried technology, or high-risk venture
• promoted by a technically or professionally qualified
entrepreneur
• the venture capitalist expects the enterprise to have a high
growth rate, provides management and business skills to
the enterprise, expects medium to long-term capital
gains, and does not expect any collateral to cover the
capital provided.
 Venture Capital Defined.
• Venture capital was a source of money for
start-up companies.
• This was typically raised by venture
capital firms who invest in young rapidly
growing private companies that need
capital to develop and market their products
and have the potential to develop into
significant economic contributors.
• In return for this investment, the venture
capitalists generally receive significant
ownership of the company and seats on the
board
Venture Capital Defined.
• As per National Venture Capital Association (NVCA),
professionally managed venture capital firms are generally private
partnerships or closely-held corporations funded by:
• private and public pension funds
• endowment funds
• Foundations
• Corporations
• wealthy individuals
• foreign investors,
• and venture capitalists
Venture Capital Defined.
• But as per the European Private Equity and Venture Capital
Association (EVCA), 2007, venture capital is actually a subset of private
equity and refers to equity investments made for launch, early
development, or expansion of a business.
• It has a particular emphasis on entrepreneurial undertakings rather than
mature businesses.
• Private Equity covers not only the financing required to create a business,
but also includes financing in the subsequent development stages of its life
cycle.
Venture Capital Defined.
• A difference was observed between US (NVCA) and Europe (EVCA),
wherein venture capital firms in US invest in seed, startup, and
expansion stages and excludes buyouts which come under the
purview of private equity firms, but in Europe venture capital firms
provide finance in all stages including from start-up to buyouts.
• But there is a similar view across both markets that private equity
investments can range from start up to buyouts. This made it clear that
venture capital is a subset of private equity.
 Venture Capital and Private Equity as a
Source of Capital
• Private Equity is the provision of equity capital by
financial investors – over the medium or long term – to
non-quoted companies with high growth potential
• Venture Capital is, strictly speaking, a subset of
private equity and refers to equity investments made for
the launch, early development, or expansion of a
business. It has a particular emphasis on entrepreneurial
undertakings rather than on mature businesses.
 Venture Capital and Private Equity as a
Source of Capital
• Private equity covers not only the financing
required to create a business, but also includes
financing in the subsequent development
stages of its life cycle.
• When financing is required to management
team to buy an existing company from its
current stakeholders, such a transaction is
called a buyout.
Venture Capital and Private Equity as a
Source of Capital
• Private equity and venture capital may refer to different stages of
the investment but the essential definition remains the same: it is the
provision of capital, after a process of negotiation between the
investment fund manager and the entrepreneur, with the aim of
developing the business and creating value.
• For the sake of simplicity, from this point onwards, the term private
equity will be used to cover both venture capital and buyout.
Is Private Equity right for Your Business?

• The following questions are designed to help you assess

whether private equity is right for you. If your answers are
predominantly “yes”, then private equity is worth
considering. If there are too many negative responses, it will
be difficult for you to interest private equity investors.
 Is Private Equity right for Your Business?

• Are you prepared to take on the responsibility of

being an entrepreneur? To run a business with a
method and structures?
• Are you prepared to give up part of your company’s
capital to a private investor?
• Does your business operate in a growth market?
• Are your company’s development prospects
sufficiently ambitious?
Is Private Equity right for Your Business?

• Is your team prepared to follow you? Does it have

the necessary experience?
• Does you company have a certain technological or
competitive advantage that can be developed or
exploited?
• Are you prepared to share certain strategic
decisions with shareholders outside your “inner
circle”?
• Is there a realistic exit strategy for all
shareholders?
 Is Private Equity right for Your Business?

• Growth Market – It exists when the

size of the market continues to grow
at an increasing rate. It is a business
environment where the potential for
sales and profits is high due to rapid
growth.
 Is Private Equity right for Your Business?
• Exit Strategy - It is a contingency plan executed by an investor, venture capitalist, or business
owner to liquidate a position in a financial asset or dispose of tangible business assets once
predetermined criteria have been met or exceeded.

• An exit strategy may be executed to exit a nonperforming investment or close an unprofitable

business. In this case, the purpose of the exit strategy is to limit losses. There are also exit
strategies executed when target profits are achieved. Examples of exit strategies are IPOs,
strategic acquisitions (merger and acquisition), and management buyouts
Is Private Equity right for Your Business?
Private equity is an option worth exploring when you want to:

• Create a business
• Improve and develop your export performance
• Exploit the creativity and innovation of your team
• Recruit highly qualified personnel
• Sell part or all of your company
• Change the size of your business and take over one of your competitors
• Launch a new product
• Improve your management capacity
• Liquidize some of your assets
Private Equity Business Model
Private Equity Business Model
Private equity firms (known as private equity management
companies or General Partners (GPs), establish investment
funds that collect capital from investors (known as Limited
Partners or LPs). The private equity firms use this capital to
buy high-potential companies (known as the portfolio or
investee companies).
How Venture Capital Works
Private Equity Business Model

• Thus, private equity fund managers invite institutional

investors and individuals with particular expertise or
significant assets, to subscribe to an investment fund for a set
period (average of 10 years), which will take equity stakes in
high-potential companies following a clearly defined
investment strategy.
Private Equity Investors Vs. Venture
Capitalists Vs. Angel Investors

• Technically, venture capital (VC) is a form of private equity.

• The main difference is that while private equity investors

prefer stable companies, VC investors usually come in during
the startup phase.
 Venture Capitalists vs. Angel Investors
• The primary difference between a venture capitalist and an
angel investor is whose money is being invested:

Venture Capitalists invest capital controlled by a venture

capital fund or firm, while angel investors invest their own
money.
QUIZ 1
 Quiz 1 (True or False)
1. Venture Capital is a form of private equity
2. The investors in a venture capital firm is also called the General
Partners
3. Private equity firms prefer stable companies
4. Private equity covers not only the financing required to create a
business, but also includes financing in the subsequent
development stages of its life cycle.
5. Private Equity refers to equity investments made for the launch,
early development, or expansion of a business
 Quiz 1 (True or False)
6. Venture Capital originally evolved in UK
7. Venture Capitalists invest capital controlled by a venture capital
fund or firm
8. The primary difference between a venture capitalist and an angel
investor is the provision of capital
9. The General Partners use the pooled capital to buy high-potential
companies
10. Venture capital firms in US invest in seed, startup, and expansion
stages and excludes buyouts
QUIZ 2
 Quiz 2 (Identification)
1. It exists when the size of the market continues to grow at an
increasing rate. It is a business environment where the potential
for sales and profits is high due to rapid growth.

2. It is something pledged as security for repayment of a loan

3. It is the term used when a private company first sells shares of

stock to the public
 Quiz 2 (Identification)
3. They invest their own money to start-up businesses

4. A transaction when financing is required to management team to

buy an existing company from its current stakeholders

5. What type of partner are the investors in a private equity

management companies?
 Quiz 2 (Identification)
6. It may be executed to exit a nonperforming investment or close an
unprofitable business

7. It is the combination of two firms, which subsequently form a new legal

entity under the banner of one corporate name

8. They are financial institutions that offer services to both corporations

issuing securities and investors buying securities. They facilitate the flow of
funds from the public market and corporations to the venture capital firms
 Quiz 2 (Identification)
9. It is a contingency plan executed by an investor, venture capitalist,
or business owner to liquidate a position in a financial asset or
dispose of tangible business assets once predetermined criteria have
been met or exceeded.

10. It is type of financing that involves obtaining funds in exchange

for ownership.
Stages of Venture Capital Cycle

• The venture capital cycle is the process that venture

capitalists use to identify, invest in, and exit early-stage
companies.

• The cycle has four main stages: ideation, startup, growth,

and exit.
Stages of Venture Capital Cycle
• Ideation is the stage where entrepreneurs come up with an idea for a
new company. This can be done through market research, customer
feedback, or simply by recognizing a problem that needs to be solved.

• Startup is the stage where the entrepreneur begins to put their idea
into action. They will start building a team, developing a product, and
raising capital. This is the most-risky stage of the cycle, as there is no
guarantee that the company will be successful.
Stages of Venture Capital Cycle
• Growth is the stage where the company begins to scale. They will
start to see revenue growth and may begin to raise capital to fuel their
expansion. This is the most exciting stage for investors, as it is when
the company has the potential to generate the most return.

• Exit is the stage where the investors will sell their shares in the
company, either through an IPO or by selling to another company.
This is the point at which the investors will realize their return on
investment.
Stages of Venture Capital Cycle
• The venture capital cycle is a continuous process, and each stage
builds on the previous one. A successful company will go through
multiple rounds of funding, and each round will take them closer to
their ultimate goal of an exit.

• As an early-stage investor, it is important to understand the different

stages of the venture capital cycle. By understanding the risks and
rewards associated with each stage, you can make informed decisions
about which companies to invest in.
Key Moments in the Venture Capital Cycle

• Venture capitalists are always looking for the next big thing.
They want to find and invest in companies that have the
potential to grow and become successful. But how do they
know when a company is ready to take off?
Key Moments in the Venture Capital Cycle
• There are certain key moments in the venture capital cycle that
can indicate whether a company is ready for investment. Here
are some of the most important ones:

1. The Idea
The first key moment is when the entrepreneur has the initial
idea for their business. This is when the company is born and
the journey begins.
Key Moments in the Venture Capital Cycle

2. The Prototype
The second key moment is when the entrepreneur creates a
prototype of their product or service. This is an important
milestone as it shows that the entrepreneur is serious about
their idea and is willing to put in the work to make it a reality.
Key Moments in the Venture Capital Cycle

3. The Launch
The third key moment is when the company launches its
product or service to the market. This is a critical moment as it
will determine whether the company is able to gain traction
with customers and generate revenue.
Key Moments in the Venture Capital Cycle

4. The Growth
The fourth key moment is when the company starts to
experience growth. This is usually indicated by an increase in
sales and customers. At this stage, the company is starting to
prove its viability and is ready for further investment.
Key Moments in the Venture Capital Cycle

5. The Exit
The final key moment is when the company is sold or goes
public. This is when the venture capitalists' cash in on their
investment and receive a return on their investment.
The Importance of Due diligence in the
Venture Capital Cycle

Venture capitalists (VCs) are always looking for the next big
thing, the next company that will change the world. But with
so many startups out there, it can be hard to know which ones
are worth investing in. That's where due diligence comes in.
The Importance of Due diligence in the
Venture Capital Cycle

Due diligence is the process of investigating a potential

investment, and it's an essential part of the VC cycle. By doing
their due diligence, VCs can make sure they're investing in the
right companies and avoid potential pitfalls
The Importance of Due diligence in the
Venture Capital Cycle
There are four main areas that VCs focus on when they're
doing due diligence:
1. the team,
2. the market,
3. the product,
4. and the financials.
The Importance of Due diligence in the
Venture Capital Cycle
• The team is one of the most important factors in a startup's
success. VCs want to invest in companies with strong teams who
have the experience and skills to make their vision a reality.

• The market is another important factor. VCs want to make sure

there's a large enough market for the startup's product or service.
They also want to make sure the startup has a competitive
advantage in that market.
The Importance of Due diligence in the
Venture Capital Cycle
• The product is another key area of focus. VCs want to make sure the
startup has a product or service that people want or need. They also want
to make sure the product is differentiated from its competitors.

• Finally, VCs looks at the financials of a startup. They want to

make sure the company is financially sound and has a solid
business model.
How to Manage Risk in the Venture
Capital Cycle
• As a general rule, the higher the risk in an investment, the
higher the potential return. That's why early-stage investors in
venture capital (VC) funds are typically rewarded with higher
returns than later stage investors.

• However, there is a flip side to this coin. Early-stage investors

also face a higher risk of losing their entire investment than later
stage investors.
How to Manage Risk in the Venture
Capital Cycle
• To manage this risk, early-stage VC investors need to have a clear
understanding of the venture capital cycle and how to identify the best time
to invest in a VC fund.

• The venture capital cycle consists of four distinct stages:

• 1. Pre-Seed
• 2. Seed
• 3. Early-Stage
• 4. Late-Stage
• Each stage presents different risks and rewards for investors.
How to Manage Risk in the Venture
Capital Cycle

• Pre-seed stage: This is the riskiest stage of the venture capital

cycle as there is typically no track record for the startup and
little to no revenue. However, this is also the stage where the
most disruptive and innovative startups are born. For early-
stage VC investors, the key is to identify startups with the
potential to become unicorns
How to Manage Risk in the Venture
Capital Cycle

• Seed stage: At this stage, startups have typically developed a

product and are starting to generate revenue. The risk is lower
than the pre-seed stage but still higher than later stages. For
early-stage VC investors, the key is to identify startups with a
strong team and a defensible market opportunity.
How to Manage Risk in the Venture
Capital Cycle

• Early-stage: At this stage, startups have typically achieved

product/market fit and are starting to scale. The risk is lower
than the seed stage but still higher than later stages. For early-
stage VC investors, the key is to identify startups with a large
and growing addressable market.
How to Manage Risk in the Venture
Capital Cycle

• Late-stage: At this stage, startups are typically profitable and

have achieved significant scale. The risk is lower than earlier
stages but there is still some risk of loss for investors. For
early-stage VC investors, the key is to identify startups that
are leaders in their respective markets.
Exits An Important Part of the Venture
Capital Cycle

• As a startup grows, its valuation also grows. At some point,

the company will reach a point where it is ready to exit the
venture capital cycle.
• There are several ways that a company can exit, but the most
common are through an initial public offering (IPO) or being
acquired by another company.
Exits An Important Part of the Venture
Capital Cycle
• An IPO is when a company sells shares of itself to the public for
the first time. This is a way for a company to raise capital to
continue growing its business. After an IPO, the company's
shares are traded on a stock exchange.

• Being acquired by another company is when another company

buys all or most of the shares of the company being acquired.
This is usually done so that the acquiring company can add the
acquired company's products or services to its own offerings.
Exits An Important Part of the Venture
Capital Cycle

• Exits are an important part of the venture capital cycle

because they provide a way for venture capitalists to make
money from their investment in a startup. Without exits,
venture capitalists would not be able to make the returns that
they expect and would be less likely to invest in startups.
Exits An Important Part of the Venture
Capital Cycle
• While exits are important, they are not the only thing that
venture capitalists care about. They also care about the potential
for a startup to grow into a large and successful company.

• This is why you will often hear venture capitalists say that they
are looking for companies with unicorn potential. Unicorn
companies are startups that have the potential to grow into large
and successful companies.
Legal Considerations in the Venture
Capital Cycle

• There are a number of legal considerations that need to be taken

into account when venturing into the world of venture capital.
• Perhaps the most important consideration is the formation of
the venture capital fund itself. The fund must be properly
structured in order to attract investors and to provide the
necessary protections for those investors.
Legal Considerations in the Venture
Capital Cycle
• Another key consideration is the negotiation of the partnership
agreement between the venture capitalists and the startup
company.
• This agreement will govern the relationship between the two
parties and will set forth the rights and obligations of each. It is
important to have an experienced lawyer involved in this
process to ensure that the agreement is fair and to protect the
interests of the venture capitalists.
Legal Considerations in the Venture
Capital Cycle
• Once the venture capital fund is up and running, the next legal
consideration is the selection of the right investments. The
venture capitalists will need to do their due diligence in order to
identify promising startups. They will also need to negotiate
favorable terms in the investment agreements. Again, it is
important to have experienced legal counsel involved in this
process.
Legal Considerations in the Venture
Capital Cycle

• Finally, once an investment has been made, the venture

capitalists will need to monitor the progress of the startup
company. If things are not going well, they may need to take
action to protect their investment.
The Capital Gap

• The capital gap, just as its name suggests, is a discrepancy

between the available capital and the capital necessary for
startups to thrive. This money is deployed to newborn
companies (typically in the startup/early through growth stages)
in order to fuel product development, build a team, and
accelerate growth.
 State of
Philippine
Venture
Capital
Investment
•THANK YOU