A. Estimate the value of the new venture at the end of year 5. Show your answer using both the direct comparison method and the direct capitalization method. What assumption are you making when using the current price-to-earning relationship for the comparable firm?
B. Estimate the present value of the venture at the end of year 0 if the venture capitalist wants a 40 percent annual rate of return on the investment.
8. Who are the major suppliers of venture capital by type and size of commitment?
9. What is meant by the terms (a) capital call, (b) deal flow, and (c) due diligence?
10. What is meant by the terms (a) lead investors, (b) SLOR, and (c) term sheet?
12. Why do venture capitalists make quick decisions on the infeasibility of some business plans? When a business plan is not quickly determined to be infeasible, what happens next and why?
15. Why are venture capital funds typically organized as limited partnerships? In particular, why are they private firms instead of public firms?
MINI CASE: INTERACT SYSTEMS, INC.
A. VC is considering providing the additional $5 million. What type of fund (stage specialization, industry focus, etc.) would you approach? In what part of their investing cycle would you hope to approach them?
B. Discuss how Interact Systems would expect to fare in the VC screening process involving each element of Figure 11.5.
C. Discuss typical issues that might be addressed in a term sheet using Figure 11.6 as a reference.