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¶ … Capital
According to the National Venture Capital Association (NVCA, 2012), the venture capital industry is attracted to companies that are developing significant innovations. Some examples cited are a new piece of software, a new drug or a new model for consumer sales. Venture capitalists enter the industry when the product is ready to take to market, and is in a position to enjoy significant growth. Venture capitalists therefore seek out businesses with a high potential for success, and they provide the capital that allows those businesses to succeed.
The businesses that venture capitalists prefer are at a stage where they are more than just an idea, that there is something the company can take to market. Venture capitalists want to see that there are revenue streams coming down the pipeline, because the venture capitalist needs to be able to envision an exit strategy.
Often, venture capitalists seek out companies where they can add their own value. This usually means in terms of management. VCs will seek out companies that have inventors, engineers and scientists, but perhaps have a deficit in professional management or in marketing expertise. This is where the venture capitalist can enter, add this expertise and financing, and allow the business to...
The investment that Pacific Ridge is proposing for Neverfail is $1million. In order to return 40% over five years, the future EBIT would need to grow at that rate over the course of this period. Indeed, there will be dilution if there is another round of financing in twelve months, so the growth must take that into account as well.
Currently, Neverfail is losing money. The company had sales of $2.2 million, but has a high burn rate. The company's revenues will need to double for the next five years in order to put the company into a position where it can be profitable and the equity value can increase. There are many ways for Pacific Ridge to earn its return, however, and much of the return might come at the point where Neverfail is taken public. The total value that Neverfail is hoping to extract from the company is around $5.4 million on the initial $1 million investment.
3. There are two major issues in the terms and conditions from the perspective of Neverfail. The first is that the preferred stock has a 20% accrued dividend. This creates no incentive for Pacific Ridge to contribute to the company, and it represents significant risk for Neverfail and its partners. If the company does not succeed…
Works Cited:
Babson. (1999). Neverfail computing. Arthur M. Blank Center for Entrepreneurship. Retrieved May 7, 2012 from http://higheredbcs.wiley.com/legacy/college/bygrave/0471755451/add_cases/neverfail_case.pdf
Koester, E. (2009). Venture capital term sheet: Registration rights. Avvo. Retrieved May 7, 2012 from http://www.avvo.com/legal-guides/ugc/venture-capital-term-sheet-registration-rights
NVCA. (2012). VC industry overview. National Venture Capital Association. Retrieved May 7, 2012 from http://www.nvca.org/index.php?option=com_content&view=article&id=141&Itemid=589
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