Sometimes buying a new business isn’t what you’re looking to do. There’s a lot to go through and even more to figure out. However, you can also buy companies that are in trouble and make them into something better. This may seem difficult, but with enough investors, it can become quite the venture.
Private equity is pretty much when you invest in a company with very little money, or that is going bankrupt. You now own a piece of it and are responsible for it. On the other hand, you also have the potential to make the business sink or swim. This means that you are also responsible for repaying any loans you and the other investors take out for the benefit of the business.
You can take something that was previously failing and make it into a better company than it was before. However, to do this, you need adequate private equity funding. But also keep in mind that this isn’t a one person venture. You need help financially and to have other investors willing to help you along with enough funding to completely renovate and fix the business you are investing in. There are several ways to come across enough money in order to do so. One way is loans. Continue reading →
In this post, we will answer 5 Questions on Venture Capital Investment, that we have seen from early stage companies seeking Venture Capital funding. The above video also expresses similar views.
Q1: How does Venture capital work?
Answer: Venture capital is the term used for unsecured equity funding by specialist investment firms (often focusing on a few sectors) in return for a part of the equity in the company being funded. Venture capital investments carry considerable risk because they are unsecured and it is estimates that only 1 in 10 early stage companies generates good profits.
Q2: How much equity stake do VCs usually take?
Answer: The most common equity stakes taken seem to be in the range of 20-50%, which ensure that if the company succeeds, then the VC makes a good return. Over 50% equity investment by any one VC is rare because the risk increases significantly.
Q3. What do a VC expect in return for the equity funding.
Answer: Because only a few ventures actually become profitable, a venture capital company looks for a high return (a compound return of 25% or more) on each plan, largely generated by growth in the share value of the invested company through increasing brand name and also increasing sales. Most VCs also seek a representation on the company’s board, though it is not a guarantee of producing success from the venture. A good VC would be a partner with the entrepreneur. So personal dynamics are very important. VCs help with raising additional money and financial strategy and also executive team strengthening.
Q4: How much time does it take to raise venture capital?
Answer: It takes about 6 months. Raising capital will take longer than you imagine. Plan for 6 months, and think beyond initial funding. Set realistic milestones, and keep planning for future capital. Learn from others, including other business owners and investors. If you are looking for funding, you have to be patient. For every VC who invests in your venture, there will be 10 VCs who would say no to you.
Q5: How should we approach the business plan writing?
Answer: When it comes business plans, you need a crisp 1-2 page executive summary and it must show a good story of what you want to achieve and what resources you have and what you are looking for. The more you precisely know your Haves and Have Nots, the better your business plan. So don’t get trapped in a 50 business plan that’s full of all kinds of data and it never completes itself.
A long business plan is not a good idea if the same message can be expressed in a couple of pages. Don’t confuse number of pages with clarity of thoughts. Go ahead with a business plan that’s brief and present a coherent logic that interests to the VC. Be honest on things you don’t know. Investors appreciate people who are transparent.
Warren Buffet doesn’t have to prove anything to anyone because his performance numbers speak for themselves. And that’s what makes it so interesting to hear him take Q&A: “The nastier the better”… as he says!
It’s a long video… if you are in a rush, here’s our summary of the various Q&A:
Q1. What do you look for in the people you like to work with?
WB: I like to work with people I like. I don’t look at their CVs or Grades to decide who can do what. In fact, I don’t even look if they have a degree. If you are working with people you don’t enjoy, please do yourself a favour, and leave the job and work with people you like. You’ll do better.
Q2. What kind of businesses do you like to invest in?
WB: I want to invest in businesses that are stable and where I can visualize it 10 years from now. Companies like Coke (soft drinks), Gillette (mens shaving blades) are examples of my investment choices. There are many others like GEICO (automotive insurance), Nebraska Furniture Mart (maximum sales from a single store location in the US), Iscar Metalworking Company (an industry leader in metal-cutting tools from Israel). I don’t have the understanding of technology-intensive business like software etc, and I stay away from them.
Q3. How do you do business valuation? How detailed is it?
WB: I like to invest in businesses where I have great comfort with the business owner. A paragraph is often sufficient to know the business value. The example being Nebraska Furniture Mart owned by Mrs. Rose Blumpkin, who recently turned 101 years, who has no formal education but has great common sense.
Q4. Tell us some of your bad decisions and what you learned from them?
WB: I invested in US Air though it was a difficult sector. Call it Temporary Insanity. I have learned that my bad decisions have happened when I had more cash than necessary. The airline industry is one step forward for mankind, a giant step backward for capitalism! And then there are other mistakes that conventional accounting does not capture, like the selling of 5% stake in Walt Disney (at $6m) within a year of buying it (at $4mn) in the 1960s. Today that stake is worth over a billion dollars.
Q5. Why not split the Berkshire Hathaway share to make it more affordable to investors?
WB: I think of my investors as a club or an audience in my presentation and we want long-term investors not traders. I don’t want high trading volumes for our shares. In fact, I will be happy with no trading at all. Our share price ($25k per share in recent times) has helped us maintain that seriousness and attract long-term investors.
Our thoughts: Is Facebook 10 times the value of YouTube (which definitely is growing as the largest media and information sharing community online)? This looks more like wanting to stay in the “online social-site play” than business value. Microsoft will of course like to believe otherwise because they have already bought it.
Microsoft is quoting the 50 million users of today (and projected 300 million in 2-3 years) as the source of value. With $240m, you can create similar user communities on CNN and BBC – potentially getting over 100 million on its own – and with majority stake. Wonder if these alternatives were explored at all.
Microsoft also got exclusive rights to sell ads on Facebook outside of the US as part of the investment (60% of Facebook users are outside US)
This is the real benefit. Its similar to how Google bought ad rights for MySpace for $900 million in August last year. Now MySpace was supposed to have 100 million users, but analysis revealed 43 million. Along similar lines, its possible that Facebook has about 25 million real users (or about 15 million non-US users).
MSN Ad Network (similar to Google’s ad network) will benefit with a captive demand – and will keep MSN Ad Network alive (maybe this was the real thought behind the deal – and also the reason why Google didn’t push it hard – as they already have what Micorsoft wanted most). Without considering any additional deals by Microsoft into Facbook, it will need $120 million of ad sales to break-even on this investment. We’ll keep an eye on this.
Most of us will happily switch over to Renewable Energy if its available at around the same price. Some Renewable Energy producers are seeking the “cap and trade system” to boost the eco-friendly energy. But a bill to cap carbon dioxide is not easy – conventional energy companies have made deep investments. For example, Mike Morris, the CEO of AEP (American Electric Power), feels the use of coal is still needed to meet the base energy requirements. Still, given the thrust for green and environmental friendly energy, and with certain VCs willing to invest in them in a phase by phase approach, we can be sure to see some good innovations within a 5-10 years. Manoush Zomorodi of Reuters reports. If you are interested in Solar Energy, head over to this site that is dedicated just to it: Solar Energy Review