Chapter 6
Venture Capital
CHAPTER GOALS
After reading this chapter you should:
. know the characteristics of a firm appropriate for venture capital
financing
. understand the structure of the venture capital industry
. understand a term sheet and the reason for the terms
. be able to value a business using the venture capital method
INTRODUCTION
Businesses that are in a rapid growth phase often find a need for financial
assistance well beyond their current resources and networks. While this is a
very positive indicator for a business, the search for outside investment can
be extremely challenging. For firms with very high growth prospects and a
high probability of exit through sale of the company or initial public offering
(IPO), venture capital may be the answer to a firm’s capital needs. This
chapter looks at the world of venture capital. We will look at the structure of
the venture capital industry and a typical venture capital partnership. We
will examine a term sheet and analyze the reasons for common deal terms. In
addition, we will cover the venture capital method of valuation.
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