Tag Archives | angel investor

Internal Rate Of Return Example

See Also:
Internal Rate of Return Method
Discounted Cash Flow vs. IRR
NPV vs IRR
Required Rate of Return

Internal Rate of Return Example

An internal rate of return example is quite common in capital markets. The internal rate of return example below will be seen by anyone seeking angel, venture capital, equity mezzanine, or other forms of Owner’s Equity.

For example, Techco has developed a revolutionary online shopping cart for e-commerce. It believes that, with an investment for marketing expenses, the company concept can be quickly grown to profitability.

Capco is a venture capital firm that invests in early-stage companies that serve the business to business market. Furthermore, Capco invests only in companies with an existing product and an expectation of quick return on equity. They use the internal rate of return method and only invest in companies which currently have a rate of return of 30% or more. So, their IRR hurdle is 30%.

Initial Investment -$5000 Cash flow in Year 1 $1,000 Cash flow in Year 2 $3,000 Cash flow in Year 3 $6,000

Techco and Capco had a great first meeting. Techco would love to gain marketing expertise and funding from the Capco team. Capco appreciates the experience of the Techco management team, feels the company concept fits well into their field of interest, and knows that this investment has the growth potential necessary. The only concern is whether Techco can yield the required IRR calculation of 30%.

IRR Calculation

To make the final decision, Techco and Capco run the following IRR formula calculation as an internal rate of return financial calculator:

0 = -$5000 + ($1000 / (1 + IRR) ^1) + ($3,000 / (1 + IRR) ^ 2) + ($6,000 / (1 + IRR) ^ 3)

IRR = 32.979%

Techco and Capco mutually come to the conclusion that Techco’s IRR is 32.979%. As a result, Capco is confident that since Techco’s internal rate of return model is currently above 30%, it will probably grow with additional marketing. Capco and Techco, because of this, decide to become partners.

Private equity markets regularly deal with the above internal rate of return formula example and IRR formula calculation. As a matter of survival, they must have a strong grasp of the IRR definition, IRR formula, and IRR limitations.

Limitations of Internal Rate of Return

The internal rate of return calculation assumes that you will reinvest cash flows each year at a constant rate. For those internal rate of returns that are high (greater than 25%), it is impractical to think that you will find alternative investments at that same higher rate. This limitation is the biggest drawback to using the internal rate of return method. In order to compensate for the high return of the internal rate of return calculation, the Modified Internal Rate of Return (MIRR) was created so that the annual cash flows are reinvested at a lower, more probable reinvestment rate.

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Equity Interest Definition

See Also:
Brand Equity
Return on Common Equity (ROCE)
Return on Equity Analysis
Carried Interests

Equity Interest Definition

Equity interest, defined as the amount of equity a single person holds in a business, is a common concept to the small business world. For example, if an angel investor receives 25% ownership of a company, the investor has a 25% equity interest in that business. Equity interest accounting is simple: equity is worth nothing until it results in cash flows, either through disbursement of dividends or the sale of assets. At this point standard capital gains tax applies.

Equity Interest Explanation

Equity interest is the level of interest an owner has in the success of a company. It is also a basic business concept. The equity interest rate could be seen as the level of motivation a single owner has towards the outcome of the project. For example, a founder with 90% ownership will work harder for a successful outcome than a founder with 1% ownership. Due to the fact that owners have a difficult time leading a business to growth, their ownership in the business is an obvious factor of motivation while working.

To mitigate the risk of business a financial derivative known as an equity interest rate swap has been created. This is an agreement where future success of a business, measured in cash flows, is agreed to be shared between two businesses. If one business sees success, it pays a portion of this success to the other. In the event that the other business sees success, the other business would then pay the first company a portion of their cash flows. An equity interest rate correlation between the cash flows of the two businesses assures that none sees failure outright.

Equity Interest Example

Frank is an angel investor. He has worked hard to build and sell his first company. Since he has already achieved that, he now turns his focus on investing in other budding entrepreneurs. Frank loves to see businesses grow with the owners.

Frank is invested in multiple businesses. One, a green products manufacturer, has received $1,000,000 from Frank. For this he received 40% ownership. Another, a Web 2.0 company, has received $1,500,000 from Frank. In this business, Frank owns 25%. Yet another, a simple e-commerce store, has received only $750,000 from Frank. Frank owns 15% of this business.

The total value of Frank’s equity interest is $3,250,000. Phrased in terms of a percentage, Frank’s equity interest in all of the businesses is a combined 80%. Though Frank does not own a majority percentage of these businesses he has 80% ownership as a total of 3 businesses.

Frank knows that he, in the event of a disagreement, will not be able to argue control of any business that he does not have approximately 30% of ownership for. This is due to the fact that courts tend to rule in the favor of the majority owner. Unless they appear to have been neglecting the business, that is the case. Frank can accept this for 2 reasons. He trusts the majority shareholders and sees this as just a risk of doing business. If Frank could not accept this, he would be wise to only invest in a business with the end result of 30% or more of total shares of stock.

equity interest definition

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Cash Flow Statement Example

See Also:
Cash Flow Statement
Statement of Financial Accounting Standards (SFAS)
What is GAAP?
Daily Cash Flow Forecast
Prepare an Investor Package

Cash Flow Statement Example

For example, Saundra has started providing angel investment to promising start-up businesses. Operating under the name Angelco, she is using the wealth she built in her professional career to provide a chance of success for up and coming Entrepreneurs. Saundra also is not afraid of the returns she will make if one of her portfolio companies were to succeed and reach capitalization.

Saundra has a job which requires constant due diligence. She must constantly monitor the companies she has invested in to ensure the professionalism with which she personally conducts business. As a result, she must constantly monitor financial statements. One such statement of monumental importance is the cash flow statement. Saundra survives, in part, through her skills of cash flow statement analysis.

Recent Changes of Balance Sheets

First, Saundra wants to know how recent changes to the balance sheets of her companies affect cash and similar assets. To do this she looks to the most recent cash flow statements which were sent to her. Upon inspection Saundra finds that three of her five companies are performing well and cash is increasing as income in the fledgling companies begins to outpace costs.

On her fourth company she does not see this result. Saundra understands that this could be the result of any number of reasons; slow growth, one-time problems, or poor management. Saundra has set a policy of allowing a grace period for problems to be rectified. Beyond this period, she will have to step in and replace current managers with her own team.

For her fifth company Saundra comes to the conclusion, after looking through her files, that she has not received a cash flow statement. She fears she may have to get tough with these founders but continues her analysis.

Monitor Financing, Investment, and Operational Performance

Saundra also wants to monitor the financing, investment, and operational performance of her companies. Again, she looks to the cash flow statement for this. Saundra, once again, is impressed with how her first three companies are controlling these actions. For her fourth company. she sees the core problem. They have purchased equipment at a price higher than average to the market. She notes that she must contact her managers to correct their mistake. With any luck, the equipment can be returned and purchased at a lower price, fixing both financing and investment issues in this business. She, of course, could not monitor this information with her fifth company.

Cash Flow Statement

Saundra has used the cash flow statement effectively because of her knowledge into the importance of the statement. Her experience combined with her analytical nature allow for effective monitoring of the big 3 financial statements: cash flow statement, income statement, and balance sheet.

Cash Flow Statement Example, Cash Flow Statement

cash flow statement example, Cash Flow Statement

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Business Driver Example

See Also:
Business Drivers
Planning Your Exit Strategy
Selling Your Business to a Private Equity Group
Leadership Action Plan

Business Driver Example

Look at the following business driver example. Dan is the owner of a startup web development firm. He has done his initial research, written a business plan, and is prepared for the operations of his business. Now, Dan needs to understand the business drivers of software development. Understanding the business drivers can give an owner a better overall understanding of their company. In other words, the more knowledgeable an owner is about the inner workings of his/her company, the more successful his company has the capability to be.

To do this, Dan begins by finding all the reading materials he can. He studies technologies, operations, human resources, and most importantly marketing and sales. Dan is attempting to discover the business drivers for enterprise architecture. He is on the path to achieving this goal.

Meet With Experts

Next, Dan attempts to meet experts in the industry. He starts with those who are close to him: family, friends, and college acquaintances. Then, he begins to find and attend networking events related to his industry. In these places Dan will flush out those who truly know about the business drivers in software development.

Dan has found information as well as experts in both operations and marketing. Now, Dan must find experts in financing his firm. He attends banker’s organizations, venture capital networking events, and his local angel investors conference. Dan, due to the assets he holds, has settled on a bank loan as his method of financing.

Conclusion

In conclusion of this business driver example, Dan’s future seems bright as he paves the way for his success. By constantly studying the business drivers, software development success is only a matter of time. He prepares for the future, resolves to save cash as best he can, and aligns his thoughts for his future.

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business driver example

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Angel Investor

See Also:
The Dilemma of Financing a Start-up Company
How to Prepare an Investor Package
What is a Term Sheet
Working Capital
Why Venture Capital?

Angel Investor Definition

The angel investor definition is someone who invests in private startup companies. They often provide the first source of outside capital for a startup company.

Role of an Angel Investor

Angel investors also provide cash and managerial expertise to startup companies in their earliest stages of development. They work with businesses even if it is only an idea. In return, the angels receive a stake in the company’s equity. Angels also influence business decisions in the company.

Furthermore, angel investors can be individual investors or groups of investors. In addition, Angels can be wealthy friends or relatives of the business owner, or they may be venture capitalists.

Finding an angel investor can be difficult. As a result, the entrepreneur seeking startup capital from angel investors must work to establish a network of affluent community and industry contacts.

Angel investors will expect you to increase the value of your company. If you want to remove any “destroyers” that may be impacting value negatively, then download the Top 10 Destroyers of Value.

Role of an Angel Investor, angel investor, angel investor definition

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