In this chapter, we examine some of the ways in which firms actually raise capital. After studying this chapter, you should understand: The venture capital market and its role in the financing of new, highrisk ventures; how securities are sold to the public and the role of investment banks in the process; initial public offerings and some of the costs of going public; how rights are issued to existing shareholders and how to value those rights. | Chapter Outline Chapter 15 Raising Capital Chapter Organization The Financing Life Cycle of a Firm: Early Stage Financing and Venture Capital The Public Issue The Basic Procedure for a New Issue The Cash Offer New Equity Sales and the Value of the Firm The Cost of Issuing Securities Rights Dilution Issuing Long-Term Debt Summary and Conclusions Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc. 2000 CLICK MOUSE OR HIT SPACEBAR TO ADVANCE Evaluation Activities Carried Out By Venture Capitalists “Prior to funding an investment as lead investor, how often do you engage in the following activities?” Interview management team/tour facilities 100% Tour facilities 100% Contact former business associates/outside investors 96% Contact current customers 93% Have informal discussions with experts about the product 84% Conduct in-depth review of pro forma financials 84% Contact competitors 71% Contact banker 62% Contact suppliers 53% Secure formal technical study of product 36% Secure formal market research study 31% Source: ‘Toward a Model of Venture Capital Investment Decision-Making” by Fried and Hirsch, 1994. Choosing a Venture Capitalist Key Considerations in Choosing a Venture Capitalist Financial Strength - the ability to supply additional resources Management Style - level of involvement in decision-making References - the results of previous ventures Contacts - ability to provide introductions Exit Strategy - how and under what circumstances does the venture capitalist plan to “cash out”? The Basic Procedure for a New Issue 1. Obtain Approval from the Board of Directors If increasing the number of shares outstanding, must submit to a vote of the shareholders 2. File preliminary prospectus (red herring) with OSC Approx. 2 week waiting period for OSC approval Tombstone ads placed 3. Revise prospectus to meet OSC approval, determine price. 4. Sell Securities to the Public T Streamlining . | Chapter Outline Chapter 15 Raising Capital Chapter Organization The Financing Life Cycle of a Firm: Early Stage Financing and Venture Capital The Public Issue The Basic Procedure for a New Issue The Cash Offer New Equity Sales and the Value of the Firm The Cost of Issuing Securities Rights Dilution Issuing Long-Term Debt Summary and Conclusions Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc. 2000 CLICK MOUSE OR HIT SPACEBAR TO ADVANCE Evaluation Activities Carried Out By Venture Capitalists “Prior to funding an investment as lead investor, how often do you engage in the following activities?” Interview management team/tour facilities 100% Tour facilities 100% Contact former business associates/outside investors 96% Contact current customers 93% Have informal discussions with experts about the product 84% Conduct in-depth review of pro forma financials 84% Contact competitors 71% Contact banker 62% Contact suppliers 53%
