Tag Archives | venture

Venture Capitalists Definition

See Also:
Why Venture Capital
The Dilemma of Financing a Start-up Company
Angel Investor
What is a Term Sheet
Working Capital

Venture Capitalists Definition

A venture capitalist is an investor who invests in risky startup businesses. The venture capital investor provides funding to an entrepreneur who may not have access to substantial bank loans or other sources of capital. Venture capitalists also invest in small companies that are expanding. They also invest in private companies planning to go public. They will often want to participate in the decision-making of the business in which they invest.

Venture Capital Investor

The venture capital investor may be one of the following:

Consider venture capital investing to be high risk and high yield. Additionally, the recipients of venture capital loans are typically small startup companies with great growth potential.

Venture Capital Funding

Venture capital funding is a source of private equity for startups, small expanding companies, and private companies that are planning to go public.

The startup business is usually at the earliest stages of development. In addition, it may be little more than an idea and a business plan. Because the startup enterprise has no record of success, the venture capital investment is considered risky. In return for the venture capital funding, the venture capitalist typically wants high returns on the loan as well as a stake in the equity of the startup company.

If the recipient is a small expanding company or a private company planning to go public, then they may not have access to substantial funding from commercial bank loans or capital markets. In any case, the venture capitalist can be a good source of funding when the business has few or no other alternatives.

Venture Capitalist Funds

Venture capital funds are pools of capital from various investors, such as wealthy individuals or investment banks. They are managed and invested in various startups or other risky enterprises. The funds seek investment opportunities with great growth potential. Consider the venture capital fund a high risk investment. As a result, investors expect to be compensated for the high risk with high yields. If you want to remove any potential destroyers risking your investment, then download the Top 10 Destroyers of Value whitepaper.

Venture Capitalist Funds, Venture Capital Investor, venture capitalists definition

Strategic CFO Lab Member Extra

Access your Exit Strategy Execution Plan in SCFO Lab. This tool enables you to maximize potential value before you exit.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Venture Capitalist Funds, Venture Capital Investor, venture capitalists definition

Share this:
0

Why Venture Capital?

See Also:
The Dilemma of Financing a Start-up Company
Angel Investor
Mezzanine Debt Financing
What is a Term Sheet
Working Capital

Why Venture Capital?

Why venture capital versus other forms of equity? For one, VC partners tend to be experienced entrepreneurs themselves who have taken a startup from inception to an exit through an IPO or private sale once or more. They can help an entrepreneur avoid common mistakes and also help position the company as it nears an exit opportunity.

They also tend to have a large number of industry contacts, which can make it easier to strike deals with suppliers and customers, as well as weather the ups and downs within a given market.

It should be noted that most VC backed startups fail, but the ones that do succeed can do so spectacularly, as a host of VC backed firms, especially in tech, have done so since 1995, such as eBay, Yahoo!, and Google.

But one must know why they believe they need to bring in a VC investor. It can be costly and business history is replete with examples of entrepreneurs who took their startup from an idea on the back of an envelope into some of the largest firms in the world without any outside equity partners.

What is Venture Capital?

Venture capital is an expensive form of financing for an entrepreneur. With most VC funds expecting compounded annual returns in excess of 25% from their investments, an entrepreneur can find themselves giving up a substantial part of their equity in the company, not to mention the loss of control and a new demanding partner to contend with. So why do it?

For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.

why venture capital
Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

why venture capital

Share this:
0

Venture Capital

See Also:
Every Business Has A Funding Source, Few Have A Lender
Don’t Tell Your Lender Everything
Due Diligence on Lenders
The Relationship With Your Lender
What Does A Lender Want To Know?

Venture Capital Definition

The Venture Capital definition is a funding source for start-up businesses or turnaround businesses. There is typically more risk associated with these types of investments, but high returns as well.

Venture Capital Meaning

The Venture Capital meaning is when a lender, usually a private equity group or high net worth individuals, provides financing for a new business, a business that needs cash for growth, or a company attempting to make a turnaround. Associated with these different business needs are the different stages of venture capital.

Seeding Stage

The first stage for the companies that are just starting up is known as the seeding stage.

Growth Stage

The next stage is the growth stage for those businesses that are not quite ready for an Initial Public Offering (IPO), but are in need of some financing to get them to that point. Often times venture capital firms provide the funding for these companies knowing that they are high risk. However, these lenders usually earn a high return as these companies go public. This is because the lenders receive large compensation in the form of equity in the company or a large cash settlement. If a company is in a turnaround stage this is the highest risk of venture capital.

Exit Stage

The exit strategy in this stage often go for a much higher cash option or equity stake than even the first and second stages of company development. This type of capital is often necessary because the companies in need of this financing are not large enough to obtain the capital from the markets in the quantity needed.

Don’t leave any value on the table! Download the Top 10 Destroyers of Value whitepaper.

venture capital, Venture Capital Definition, Venture Capital Meaning

Strategic CFO Lab Member Extra

Access your Exit Strategy Execution Plan in SCFO Lab. This tool enables you to maximize potential value before you exit.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

venture capital, Venture Capital Definition, Venture Capital Meaning

 

Share this:
0

Return On Equity Example

Return On Equity Example

A return on equity example – Melanie, after seeing success in her corporate career, has left the comfortable life to become an angel investor. She has worked diligently to select companies and their managers, hold these managers accountable to their promises, provide advice and mentoring, and lead her partners to capitalization while minimizing risk. At this stage, Melanie is ready to receive her pay-out. As a result, Melanie wants to know her Return on Equity ratio for one of her client companies.

So, Melanie begins by finding the net income and average shareholder’s equity for the venture. Looking back to her records, Melanie has invested $20,000 in the business. Her net income from it is $6,000 per year. Performing her return on equity analysis yields the following results:

Return on equity: $6,000 / $20,000 =30%

Melanie is happy with her results. Purposefully starting small, she has built the experience and confidence to be successful. She can now move on to bigger and better deals.

Don’t leave any value on the table! Download the Top 10 Destroyers of Value whitepaper.

return on equity example

Strategic CFO Lab Member Extra

Access your Exit Strategy Execution Plan in SCFO Lab. This tool enables you to maximize potential value before you exit.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

return on equity example

See Also:

Return on Common Equity (ROCE)
Return on Equity (ROE)

Share this:
0

Joint Venture (JV)

See Also:
Joint Costs
Mergers and Acquisitions (M&A)
Enterprise Value (EV)
Due Diligence
C Corporation

Joint Venture (JV) Definition

A joint venture or JV is simply the combination of two or more businesses which are joined to enter into a specific business venture. The relationship is temporary until a certain event occurs or the venture has run its course.

Joint Venture (JV) Meaning

Often, one enters into a Joint Venture when they see synergies between two companies. They can compliment each other as they both press into a new market activity. There is usually a fair amount of valuation involved to determine profit and loss sharing much like in a partnership. However, the combined JV entity is only treated as a partnership for tax purposes. The two companies considering a joint venture must establish several things before the JV agreement is final. Control over certain aspects of the JV as well as sharing of profits and losses. There is also a need to establish an exit plan because JVs are not permanent. After all of these negotiations the two companies can enter into the mutually beneficial relationship until one or both of the parties no longer see a benefit to continue the venture.

Before you enter a joint venture, your CEO needs to know how it will impact every area of the business – especially the financials. Learn how you can be the best wingman with our free How to be a Wingman guide!

Joint Venture

Strategic CFO Lab Member Extra

Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Joint Venture

Share this:
0

Capitalization Rate

See Also:
Capitalization Rate Example
Capitalization
Annual Percent Rate (APR)
Wage Rate
Currency Exchange Rates

Capitalization Rate Definition

The Capitalization Rate definition is a formula which represents the difference between annual net operating income and cost of capital. Its use in the business world serves the main purpose of valuation, including the following:

For example, the rate for hotels provides market knowledge about how well competitors pay for the capital they take.

Capitalization Rate Meaning

Capitalization Rate (CR) means a method to understand how company operations help overcome the cost of capital. Knowing this leads to a piece of information for a company; that it can pay for the price of resources. Furthermore, this shows the value of any project a company chooses to begin. It is a general valuation tool. It is also supported by the use of other financial ratios depending on industry and specific needs. In conclusion, CR is a business valuation tool.

Capitalization Rate Formula

Use the following simple capitalization rate formula to calculate CR. Remember, it can lead to great benefits.

CR = annual net operating income / cost

Calculation

Capitalization rate is processed, with the proper information, quite easily. See the following example for the capitalization rate calculation:

If:
Net income = $1,000,000
Cost = $250,000

Then:
CR = $100,000 / $250,000 = 4

Capitalization Rate and Business Valuation

Are you looking at utilizing capitalization rate as a valuation tool? When valuing a business, it is standard practice to consult with a valuation firm. Need help finding one? We will get you connected with one of our strategic partners for your valuation needs. Fill out the form below to get connected:

Your information will be received between 9-5 Monday through Friday. You can expect to hear back within 24 hours. We only use your information to contact you for the desired help.

If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.

Capitalization Rate Definition, Capitalization Rate Formula, Capitalization Rate

Strategic CFO Lab Member Extra

Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs


Capitalization Rate Definition, Capitalization Rate Formula, Capitalization Rate

 

Share this:
0

Business Plan

See Also:
Value Drivers: Building Reliable Systems to Sustain the Growth of the Business
Business Cycle
Business Intelligence and Finance
Make-or-Buy Business Decision
Acquisition Capital
Marketing Plan

Business Plan Definition

The business plan definition is the plan of action for business operations which has the goal of creating and growing sustainable profits. It is necessary for any business venture. A business plan has 3 main purposes: forming a strategic plan for future business initiatives, serving as a retrospective measure of the success of the business and it’s plans for expansion, and an explanation of the business for the purpose of raising capital. Business plans can vary greatly depending on creator, industry, operations, needs, phase in the business cycle, and more. Ultimately, the term business plan is used to describe a myriad of written documents which lay out the plans a business has for the future. Despite this, the goal is the same; creating profits for the shareholders of the venture.

Business Plan Explanation

Business plans are either internally or externally focused. Internally focused plans serve as a document to “rally the troops”; organize the stakeholders, especially employees, of a business and give an overall strategy to each of their regular tasks and actions. This has particular benefit for organization and motivation around the strategic goals that company leaders want to achieve. An internal business plan is the tool used to communicate these goals in a clear, effective, and calculated manner.

External business plans serve the purpose of raising capital. Banks constantly visit with small businesses desiring a loan to finance a new project. Meanwhile, venture capital firms accept roughly 1 out of 1000 companies that contact them for financing. An external business plan serves as a tool to show that the business concept is developed, evaluated, and planned. Investors and lenders want to eliminate as much risk as possible, and an external business plan provides them a way to measure and mitigate these risks. In short, an external business plan is a way for a developing company to stand out from other businesses while showing that goals and aspirations have been considered and documented.

These plans begin by following boilerplate sections and explanations. They then become unique documents. They are customized based on a variety of factors. For example, a web marketing firm has little use for the structure of an operations plan which is common to a manufacturing firm. In a similar fashion, a retail e-commerce store will even have a different business plan from a brick-and-mortar retail store. The factors of success, operations, marketing, risk, and measurement dictate this.

A Living Document

A business plan is often referred to as a “living document”. This is because a these plans are constantly changing. Whenever new developments in competition, marketing tools, the legal factors which relate to an industry, or others change a business plan must be updated so as to keep relevant. In this way a business plan is constantly evolving. A simple business plan is generally 20 pages, where a complicated one should not exceed 40 pages, on average.


Download The 7 Habits of Highly Effective CFOs


Business Plan Format

For a business plan, combine parts to make a whole. These parts, though different for each plan, generally follow common purposes. The standard business plan format is as follows:

1) Executive Summary

2) Business Description

3) Products and/or Services

4) Marketing Plan

5) Operations Plan

6) Management and Organizational Structure

7) Benchmarks and Milestones

8) Legal Entity Structure

9) Capitalization

10)Financial Plan and Projections

11) Appendix

Example

For example, Alejandro has decided to start a micro-lending firm in his native country of Mexico. Combining philanthropy with his enlightened self-interest, Alejandro plans to make a profit while also fostering the entrepreneurial spirit in people who face a difficult future. Alejandro is excited to start his company and therefore, make his impact on the world.

Alejandro knows that he has to create a business plan for his new venture. Despite this, he is a young adult and is not sure where to begin. Determined, Alejandro starts by searching the internet for the term how to write a business plan. He finds some results which begin his thought process. Alejandro picks up a few books from his local bookstore and begins his journey.

Writing the Business Plan

To start the business plan format, Alejandro starts by writing his executive summary. This process is difficult. Alejandro then learns from his research that to write the executive summary after the rest of the business plan. Alejandro stops this section and begins the business explanation.

After writing a rough draft explanation of his business, he begins the competitive analysis. Here, he does as much research as possible into competitors on the market. Alejandro searches the web and personal contacts for this information.

Then, Alejandro assembles industry statistics and information for his industry analysis section of the business plan. He will need to summarize these into a section which serves his purposes.

Alejandro continues and eventually finishes the plan. With a rough draft in his hand, he seeks some advice for what he has made. Alejandro knows that he has a lot to learn, so he prepares himself for a lot of criticism. He finds his local S.C.O.R.E. chapter and prepares to begin the mentoring process.

In conclusion, Alejandro knows that he has a lot to learn. Still, he realizes that anyone who has achieved greatness started somewhere. Alejandro prepares his plan more, parks his ego at the door, and walks into his meeting with a smile.

Template

Find a variety of business plan templates at S.C.O.R.E.

To learn more financial leadership skills, download the free 7 Habits of Highly Effective CFOs.

business plan definition, Business Plan Format

Strategic CFO Lab Member Extra

Access your Flash Report Execution Plan in SCFO Lab. The step-by-step plan to manage your company before your financial statements are prepared.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

business plan definition, Business Plan Format

Share this:
0

LEARN THE ART OF THE CFO