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Venture Capital Investing: The Complete Handbook for Investing in Private Businesses for Outstanding Profits

by David Gladstone, Laura Gladstone

August 2003

Beginner

528 pages

10h 26m

English

Pearson

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Background on the AuthorsAcknowledgments
What are the Basic Items to Look for in a Business Proposition?1. The Numbers Should Be Properly Presented2. The Deal Must Make Lots of Money3. The Acid Test of a Deal Is ManagementHonesty and IntegrityExperienceAchievementHigh Energy LevelMotivation4. The Situation Should Be Unique5. The Proposed Venture Should Be Oriented Toward the Market6. The Deal Must Have an ExitIt’s Not an Investment, It’s a PartnershipPrepare a Written Summary Before You Begin to InvestWhat Are You Investing In?Who Is Your Contact at the Business?Summarize the Business SituationWho Is the Management Team?What Are They Selling?How Much Money Are They Raising and How Much Are You Considering Investing?Is There Any Security for Your Investment?How Will the Money Be Used?What Is the Past Financial Performance?What Are the Projections?How Will You Cash Out?How Much Can You Make?What Do You Like About This Situation?What Do You Dislike About This Situation?What Does A Summary Look Like?CompanyType of BusinessCompany SummaryManagementFunds RequestedCollateralUse of ProceedsFinancial HistoryFinancial ProjectionsExitA Second SummaryCompanyType of BusinessCompany SummaryManagementProduct/Service and CompetitionFunds RequestedCollateralUse of ProceedsFinancial HistoryFinancial ProjectionsExitWhat Makes It Exciting?Some Words about FranchisingSound ConceptWell-Financed FranchisorHow Does the Franchisor Make Money?Good RelationsSummary—Quick Standards of Venture Capital Investing
The Study of EntrepreneursCharacteristics of EntrepreneursNeed for AchievementHigh Need for Autonomy and PowerHigh Degree of Self-Confidence and Need for ControlHigh Tolerance for AmbiguityNeed to Assume Only Moderate RiskHigh Degree of DeterminationHigh Degree of ResourcefulnessSense of UrgencyKnowing What Is RealHigh Level of EnergyMental StaminaStrong Communications SkillsHigh Degree of IntegritySeeking Partnership StatusSeeking Fair PlayHow We See EntrepreneursHow We Make JudgmentsAnalytical Approach to EvaluationsInterviewing EntrepreneursBe PreparedClear MindConducive EnvironmentBe an Effective ListenerKeep on Your Toes During the InterviewTypes of InterviewsDocument Your WorkAssessment of EntrepreneursIntellectual EffectivenessWork Approach and StylePersonal RelationshipsWhat Venture Capitalists Look for in EntrepreneursThe Entrepreneur’s Individual CharacteristicsExperience of the EntrepreneurCharacteristics of Small Business Managers versus EntrepreneursConclusions on EntrepreneursDeveloping Background InformationPersonal ReferencesBusiness ReferencesCredit ReportsPrivate InvestigationsPsychological Assessment TestsWritten InformationInformation from the EntrepreneurLocal PeoplePublic InformationCustomersInvestorsEmployeesManagement TeamOrganization Structure and Decision MakingDocumentationStrengths and WeaknessesFinal Judgment
How Is the Company Organized?Corporate Organizational ChartOfficers and DirectorsStockholdersCharacteristics of ManagementHow Are People Compensated?Employee CompensationCompensation SystemPension PlanProfit-Sharing PlanBonus PlanStock Option PlanOther BenefitsWhat Employment Contracts Exist?Employment Contracts and Special Compensation ArrangementsNoncompete AgreementsNondisclosure ContractsWhat Is the Workforce Structure?UnionsWork StoppageTraining ProgramMorale of the WorkforceWhat Personnel Records Are Maintained?Maintaining Internal RecordsPayroll RecordsEmployee Books and ManualsReports from the Personnel DepartmentHiring ProceduresMotivating EmployeesPersonnel Files of ManagementEmployee LitigationRegulatory AgenciesPersonnel ConsultantsOther Employee BenefitsHealth InsuranceSummaryMajor Strengths and WeaknessesRatio AnalysisChecklist
Who Are the People Who Market and Sell?PersonnelSalesperson AnalysisOutside RepresentativesMotivationTermination of EmployeesWhat Are They Selling?ProductsProduct DescriptionsSeasonality of ProductsProduct LiteratureProduct DevelopmentWho Buys the Product or Service?CustomersContracts with Special CustomersLoss of CustomersCustomer ComplaintsOrder BacklogCustomer Credit ApprovalCustomer’s Credit TermsDisputed InvoicesWhat Is Said to the Customer?Public RelationsAdvertisingFormal Advertising ProgramAdvertising BudgetQuestions for the Advertising PeopleWhat Is the Marketplace for the Product or Service?Market SizeCompetitorsMarket GrowthMarket InformationSubstitutes in This MarketplaceMarketing ObjectivesMarketing StrategiesHow Is Price Determined?Pricing PoliciesPricing ProcessPrice ChangesProduct WarrantyWhat Internal Reports Are Made?Marketing ReportsSales ProjectionsProcedures ManualsWhat External Information Is Available?Industry AssociationsTrade ShowsTrade PublicationsBasic InformationRatio AnalysisWhat Are the Strengths and Weaknesses?Conclusions on MarketingChecklist
The FacilityPlant MovesEquipmentThe Need for New EquipmentSurplus EquipmentCapital ExpendituresProduction CapacityProduction EmployeesMotivating EmployeesUnionsRetirement PlansStaff Meetings of Production PeopleRegulatory AgenciesSubcontracting WorkInventoryQuality ControlProduction CostsProduction LevelsBack to CapacityStrengths and Weaknesses of the Production ProcessPurchasing ProcessSuppliersReceivingShippingCustomer ServiceResearch and DevelopmentResearch and Development Strengths and WeaknessesBasic InformationProduction ReportsRatio AnalysisConclusions About ProductionChecklist
PersonnelAnalysis of the NumbersFinancial AnalysisAnalyzing the Income StatementPercentage of CompletionLoss LeadersResearch and DevelopmentStandard CostCash Flow AnalysisAnalysis of the Balance SheetInventoryFixed AssetsLiabilitiesBudgeting and ControlPast FinancingsPast Bank FinancingsEntrepreneur’s InvestmentEntrepreneur’s OwnershipParticipation with Other InvestorsUse of ProceedsProjectionsBasic InformationRatio Analysis of the Financial StatementProfitability RatiosLiquidity RatiosLeverage RatiosCash RatiosFinancial ReportsConclusions on the Financial AreaChecklist

Corporate IdentificationCorporate StructureManagement QuestionsStock QuestionsProfessional ReferencesQuestions for BankersOther Institutional LendersQuestions for Accounting FirmsQuestions for LawyersSuit SettlementQuestions for Insurance AgentsQuestions for LandlordsQuestions for Manufacturers’ RepresentativesQuestions for the Advertising PeopleQuestions for SuppliersQuestions for CustomersQuestions for CompetitorsQuestions for SubcontractorsCredit InformationConclusions on Reference Information
Pricing the DealRisk/RewardRemoving Risk by StructureReturn on InvestmentTypes of DealsUsing ProbabilityProbabilities and DeviationReturnReturn to InvestorPresent ValueInternal Rate of ReturnNet Present ValueInvestor’s StandardCommitment Letters1.. Terms of the Investment2.. Collateral and Security3.. Conditions of the Loan4.. Representations5.. Conditions of the Commitment LetterAn Investment Memorandum1.. Terms of the Investment2.. Collateral and Security3.. Conditions of the Investment4.. Representations5.. Conditions of the CommitmentOther ItemsConclusions About the Commitment Letter
First Type of Closing: Loan with OptionsDocument One: The Loan Agreement1. Purchase and Sale2. Collateral Security and Subordination3. Affirmative Covenants4. Negative Covenants5. Events of Default6. Equity Rights7. Representations and Warrants8. Fees and Expenses9. Definitions10. Conditions of Closing and MiscellaneousDocument Two: The NoteDocument Three: The Stock Purchase OptionOther Documents: ExhibitsSimple Is GoodSecond Type of Closing: Legal Documents for the Purchase of StockStock Purchase Agreement1. Purchase and Sale2. Affirmative Covenants3. Negative Covenants4. Equity Rights5. Representations and Warranties6. Fees and Expenses7. Definitions8. Restrictions9. Voting Trust10. Employment Agreement11. Consulting Contract12. Conditions to ClosingLawyers as Investors or Business OwnersExperienced Lawyers are BestProcedures for Reviewing DocumentsLegal Fees Keep Going UpHow Lawyers Run up Your Legal BillDisagree on Legal PointsRewrite SectionsResearch Points of LawLegal StyleArgumentsSyndications and LawyersThe Closing: A Moment of TruthLast-Minute ChangesClosing FeesWhat to Remember About LawyersDocumentation
InvolvementMajor Policy DecisionsMonthly ReportsMonthly Written ReportBoard Meetings/Investor MeetingsOther Discussion ItemsMaintaining Good RecordsLegal RecordsCorrespondence FileFinancial Recording FileBoard Meeting FilesTracking FileWarning SignsLate PaymentsLoss of ProfitsLate Financial ReportsPoorly Prepared Financial ReportsLarge Changes in Balance Sheet ItemsUnavailable EntrepreneurLarge TheftsMajor Adjustments in FiguresSignificant Changes in ManagementMajor Changes in Sales and Order BacklogsInventory ChangesLack of PlanningChanges in Accounting MethodsLoss of a Major Customer, Supplier, or LenderLabor ProblemsChanges in Prices and Market ShareExternal Warning SignsTechnical ChangeGeneral Industry DeclineGovernment ChangesRatio Analysis as a Warning IndicatorOur Personal Favorites of Early Warning SignalsWhy Entrepreneurs Have Financial ProblemsThe Financial Control ProblemThe Undercapitalization ProblemWhy Entrepreneurs Have People ProblemsPoor Job DefinitionPoor Selection ProcessPoor Incentives to ManagementPoor Review ProgramPoor Development ProgramWhat to Do with ProblemsWhat Is Your Next Step?1. Fix the Problem2. Sell the Business3. Foreclose on Assets4. Bankruptcy5. LiquidationSecret of a Successful RelationshipDegree of Involvement by the Venture CapitalistAmount InvestedNeed for AssistanceManagement’s Willingness to Accept AdviceExperience in Certain AreasLead InvestorDistress of CompanyRelationship with the EntrepreneurTime AvailabilityTips on Monitoring1. Set the Tone on the Way In2. Understand the Business and the Products3. Keep Up with the Industry and the Competition4. Subscribe to Industry Magazines5. Know the People in the Business6. Spend Time with the CEO7. Track PerformersPitfalls of Monitoring1. Appear Only When There Is Trouble2. React to Problems3. Second-Guess Management4. Pain FactorVenture Capitalist Objectives
Exit One: Going PublicWhen to Go PublicUnderwriter’s Fees in the Public OfferingSelection of a Brokerage House for a Public OfferingExit Two: Sale to a Strategic or Financial BuyerSelling the Stock in the Company for CashSelling Stocks for NotesSelling Stock for StockSelling Assets for CashSelling Assets for NotesSelling Assets for StockOther Forms of PaymentExit Three: Sale Back to the CompanyPurchase by Employee Stock Ownership TrustExit by Puts and CallsExit Four: Sale to Another InvestorCorporate PartnerNew Venture Capital PartnerExit Five: Reorganizing the CompanyExit Six: LiquidationWhen You Are in a WorkoutQuick StudyThe Business PlanTurnaround ExpertsLiquidation AnalysisSave Your Investment
Developing an Investment objectivePurpose of InvestingThe Type of Money You Have to InvestStage of DevelopmentSpecialty InvestingTiming of Your Investment ExitSize of Your InvestmentGeographic PreferenceLiquidity PreferenceRisk ProfileActivity LevelTiming of ReturnOriginating Investment OpportunitiesBanksAccountantsAttorneysInvestment Bankers/StockbrokersBusiness Brokers/Financial BrokersConsultantsConventionsEconomic Development OrganizationsIndustrial and Professional Trade OrganizationsLocal Chambers of CommerceFriends and AssociatesVenture Capital Companies and LBO FundsCold CallsAdvertising and Direct MailSuppliersOther GroupsProactivityHandling Investment OpportunitiesUsing BrokersQualities to Look for in a BrokerExperienceProfessionalCredentialsSpecial KnowledgeAgreement with BrokersDefinition of the ServiceTime FrameTermination ClauseAmount of the FeeReports on ProgressOwnership of Work CompletedNondisclosure ClauseIndemnificationComplete AgreementSome Tips on Dealing with BrokersFinal Word
I.. Management AreaBasic Information You Need to CollectII.. Personnel AreaBasic InformationIII.. Marketing AreaMarketing PeopleProductsCustomer DescriptionCustomer Service (C/S)Competitive AnalysisIndustry AnalysisMarketing StrategyDistribution of the ProductBasic InformationIV.. Production AreaProduction ProcessPurchasing, Suppliers, Shipping, and ReceivingBasic InformationV.. Research and DevelopmentBasic InformationVI.. Financial AreaBasic InformationAnalysis of Financial OperationsFinancial Statement AnalysisOther Assets and LiabilitiesTaxesOther SectionsAnalysis of ProjectionsBasic InformationVII.. Reference Area
What Do Actual Commitment Letters and Legal Documents Look Like?Commitment LetterLegal Document 1Loan AgreementI.. PartiesII.. LoanIII.. Use of ProceedsIV.. CollateralV.. Representations and WarrantiesVI.. Affirmative CovenantsVII.. Negative CovenantsVIII.. Investment CovenantIX.. Fees, Expenses, and IndemnificationX.. UnlockingXI.. “Put” RightsXII.. DefaultXIII.. NoticeXIV.. Entire AgreementXV.. Controlling LawXVI.. HeadingsLegal Document 2Promissory NoteInterestPaymentsMaturityPrepaymentDefault and AccelerationDefinitionsSealLegal Document 3Stock Purchase WarrantsLegal Document 4Stock Purchase AgreementLegal Document 5Schedule A: Exhibits to Stock Purchase Agreement
Summary and RecommendationEgo-driveEmpathyGrowthLeadershipDecision MakingDelegationDetail Ability

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