In every venture capital deal, control is a critical component. It can be used to block undesired outcomes or dictate desired outcomes. Typically, negative controls give the VCs the right to unilaterally block various corporate actions.
A majority of the shareholders and the board control the result of decisions that need voting. Although Venture capital funds own minority positions, they rely on protective provisions to block action they do support. Protective provisions are a standard part of the basic agreement the entrepreneur enters into with the VCs:
Common categories covered by protective provisions are winding up and dissolution of the corporation; a disposition of the corporation’s assets or a merger or sale of the corporation; issuing or creating senior or pari passu securities; amendments to the corporation’s charter; borrowing money; changing the number of directors, and redeeming securities. The protective provisions give the venture capitalist a veto right to protect they investment by not allowing stockholders or the board to undertake actions that would diminish investors’ equity value.
Entrepreneurs should always remember the agreement that binds them and ventures investor when it comes to control.
References https://www.entrepreneur.com/article/234654 https://www.strictlybusinesslawblog.com/2014/02/09/venture-capital-term-sheet-negotiation-part-6-voting-rights-protective-provisions/
Boku, a United States-based carrier billing company, listed on the London Stock Exchange’s Alternative Investment Market (AIM) recently, has raised up to £45 million in stock in their IPO.
This case is particularly interesting because Boku is only actually worth around a few hundred million dollars, a staggeringly small amount compared to the technology giants that have initiated their IPO in years past. So how Boku pull this through, and why?
Taking a look at the numbers, Boku has boasted full-year revenue numbers of $14.2 million, $15.2 million, and $14.4 million in 2014, 2015, and 2016, respectively. Evidently, growth is high for Boku, and shows improving profitability.
Another interesting point is Boku’s market. While it is a US-based company, with headquarters in the United States, Boku has decided that its trading market is in fact London, miles across the sea. While this sort of practice isn’t unheard of, it is somewhat strange to see a venture-backed, US based company going public for the first time abroad.
Still, the London Stock Exchange has commented that this IPO shows that “LSE…has a track record of offering small and micro companies access to high quality capital at lower cost and reduced regulatory burden relative to US public markets. It also shows VC shareholders can diversify funding for portfolio companies and often achieve partial exit through a London IPO.”
The venture capital industry uses due diligence to evaluate a potential investment opportunity. Investing in start-ups is risky, and the process of due diligence is used to select the potential winners, find the key risks connected to the investment and come up with a risk mitigation plan with management as part of a potential investment.
There are three stages of due diligence: screening due diligence, business due diligence, and legal due diligence. In screening due diligence stage, venture funds evaluate numerous business opportunities over the fund life and use pre-set criteria to find the opportunities to invest in. This enables them to flag fast those that fit and those they will spend more money and time evaluating.
In business due diligence, the opportunity is determined to “fit” criteria of fund’s investment. The deal is assigned to a senior and junior member of the team who evaluates further to determine the deal viability. Each firm reviews the management team, the product or service, market potential and the business model.
Legal due diligence is the last stage. In this stage, a lawyer completes a legal review. Venture capitalists should ensure that their lawyers are prepared to answer their questions.
References https://www.marsdd.com/mars-library/the-due-diligence-process-in-venture-capital/ https://www.theventurealley.com/2011/10/what-is-due-diligence/
Raising capital from venture capitalist can result in conflicts of interest. Since venture capital firms are in the business of investing, they often advise or control more than one company at a time. In such condition, the regulators are likely to look at whether the VC is complying with its fiduciary duty to act in the best interest of each company. Although it is difficult to identify all areas where venture capitalists may face a conflict of interest, here are some of the most common scenarios.
Normally, a conflict of interest arises between the fund’s investors who want to limit the funds to make sure that the capital raised is used well and a fund manager that want to maximise the fund to increase the management fees created by the fund.
A fund manager should allocate broken deal expenses and transaction expenses between the fund manager, the fund, and co-investors by reasonable investor expectations and the fund’s limited partnership agreement.
Conflict of interest is also likely to occur in co-investment scenario. This situation occurs when individual investors in the fund and the fund manager have the opportunity to independently invest in one of the fund’s portfolio companies. In case the terms under which the investors and fund managers differ from the terms under which the funds invest, a conflict of interest may arise during the negotiation of the fund’s investment.
References https://www.strictlybusinesslawblog.com/2017/05/24/managing-conflicts-interest-private-equity-venture-capital-funds/ http://fortune.com/2011/09/08/venture-capitals-conflicts-of-interest/
In the worlds of investment and finance, the venture capital industry plays an important role and is often the means by which many careers are built. Typically, venture capitalists invest a large amount of money in start-ups. Therefore, due diligence and extensive research into the start-up background is essential.
Most venture capitalist begins their day reading daily publications. They focus on publications that provide information on possible leads for investment, on trends on marketable goods, and on new companies. The rest of the VCs’ morning is filled with phone calls and meetings. In general, venture capitalist meets with other partners and members of their firm to discuss the day’s focus, potential portfolio investments, and companies that need further research.
Most Venture capitalists connect with their current portfolio companies in the afternoon. This is important for determining how well a company is operating and if the funds of venture capitalists are utilized wisely. A venture capitalist may take some members of the company out to lunch and carry out such meeting over the meal.
A VC does not necessarily have an eight-hour workday. After meeting partners and members of the current portfolio companies, the venture capitalist may decide to have an early dinner meeting with entrepreneurs appealing to the firm for funding. The VC gets a sense of the company’s potential for success during this meeting. The venture capitalist also takes notes during this meeting. These notes are presented to the firm during the morning meeting the following day.
References https://www.investopedia.com/articles/professionals/120215/day-life-venture-capitalist.asp https://blog.creandum.com/a-day-in-the-life-of-a-venture-capitalist-is-this-you-cc92f2c0993f
For expansion-stage or growing start-up companies, getting venture capital funding should be cause for celebration. High five should ensue, and every stakeholder should be happy because of venture capital scale and drive future growth. Unfortunately, many start-ups fail after raising venture capital. Today we will look at three reasons why such start-ups fail.
Company product only appeal to early adopters
Many company products aren’t a must-have in the long-run. A lot of trendy software start-ups make good products appeal to early adopters. They are only good enough in the first few days. If customers can live without your product, there is no point of trying to grow bigger using outside capital.
Unsustainable business model
It is not unusual for unprofitable businesses to get significant capital funding that allows them to run unprofitably for a long period. Although unprofitability may not be necessarily an issue in the early growth or start-up companies, lacking profitable economic model is a big problem. If you sell more of unprofitable products, you’ll be more unprofitable.
Management team is inept
Bad management can cause a business to fail. If you have not assembled a competent senior management team for your company, then the business is doomed. No amount of capital venture funding can rectify the failings of a senior management team.
References https://scalefinance.com/scale-fail-5-reasons-companies-fail-after-raising-venture-capital/ https://s3-us-west-2.amazonaws.com/cbi-content/research-reports/The-20-Reasons-Startups-Fail.pdf
Today, many companies run on their intellectual property strength. Also known as IPs, intellectual property includes trademarks, patents, copyrights, and trade secrets. When managed properly, IPs can generate a high level of returns and profits for their owners.
IP is a valuable commodity which can help differentiate a company from its competitors, drive value creation, draw in new customers and motivate M&A activity. When protected and cultivated, IP is one of the most significant tools at an organization’s disposal.
Venture capitalists are particularly interested in deals driven by the desire to invest in or acquire valuable IP assets. The largest sectors for venture capital firms in the recent years have been life science, communications, and consumer electronics. The pace of technological change in these fields has been impressive, and venture capitalists have zeroed in.
According to Ylan Steiner, a partner at King & Wood Mallesons, historically IP has rarely been the main driver for VC transactions. Despite many venture capitalists’ previous reluctance to prioritize intellectual property, times are changing. However, it is not enough for the venture capital firms to complete a deal; they need to understand the advantages of IP assets. They need to know why certain IP is important to a particular industry or firm.
References https://www.financierworldwide.com/venture-capital-and-ip-assets/#.WejYc_mCzIV https://www.forbes.com/sites/maryjuetten/2015/08/11/do-venture-capitalists-care-about-intellectual-property/#7136b9c85b87