Fundamentals of Private Equity and Venture Capital - PEI Media

GETTING THE MOST OUT OF THIS MODULE
Welcome to Module 4 in the Fundamentals of private equity series. This module
focuses on venture and early stage investing. It is designed to work both as a
stand alone section and as part of the whole series. It necessarily draws upon topics
reviewed in earlier modules, and seeks to avoid repetition of their content.
However, for the benefit of the stand alone reader, a comprehensive glossary has
been incorporated, which explains the background and use of private equity terminology.
All terms which may require explanation or expansion are printed in
bold, to indicate that there is a glossary entry for them.
Introduction
We define early stage investing as the provision
of equity capital to companies that have not
yet achieved stable, profitable trading. Exhibit 1
quickly recaps (from Module 1) the definitions of
specific types of investment within this
broad category.
The factor which unites all investments of this
type is the significantly higher level of risk
attached to unproven companies, markets, products,
technologies and management teams.
Uncertainty about future outcomes is endemic in
all forms of investment, but applies to nascent or
very young companies not only in every possible
Exhibit 1: Classifications of investment types
Investment
type
Purpose of
funding
Investee company
Characteristics
Key
objectives
Typical exit
horizon
Seed corn
To develop, refine and
market test intellectual
property, prototypes
or concepts
Non trading, usually no firm
business plan or commitment
to a specific route to
commercial exploitation at
this stage
To test and verify the
practical and commercial
viability of the product
or concept
To establish routes to
market and a viable
business model
To build a commercial
management team
5 years
or more
Spin-out
To establish a business
based on the transfer of
intellectual property
from a corporate or
academic research
environment
Similar to seed corn,
although conceptual or
intellectual property
development may be
more advanced
As with seed corn.
Replacing academic or
scientific priorities with
commercially driven
management objectives is
often the major objective
with spin-outs
5 years
or more
start-up
To establish a viable
trading concern with
customers, revenues
and a clear route
to profit
A commercially focused,
backable and (mostly)
complete management team
will be in place
To establish a sustainable
market presence
To make clear progress
towards profitability
To prove the
management team
Up to
5 years
Early stage
To accelerate the
progress of a
young company
Typically will not yet be
profitable, but will be able
to demonstrate the viability
of its product or service
and markets
Management team will
have, to some extent,
demonstrated their
competence and
effectiveness
To achieve profitable
trading and a solid
platform for growth
3–5 years
COPYING WITHOUT PERMISSION IS UNLAWFUL
THE FUNDAMENTALS OF PRIVATE EQUITY 5