 Welcome to the session. This is Professor Farhad. In this session we would look at venture capital which is a topic covered in introduction to finance course as well the CPABEC exam. As always I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1500 plus accounting, auditing, finance and tax lectures. Here is a list of all courses. Maybe this is not a comprehensive list of all the courses that I cover. On my website I do have additional resources such as PowerPoint slides, quizzes, multiple choice questions, exercises and 2000 CPA questions. I strongly suggest you check out my website for additional resources. Studypal.co is an artificial intelligence driven study body system. That matches you with a CPA or a CFA. If you'd like to study with bodies or groups they are in 85 countries and 2800 cities. Venture capital. What is venture capital? What is that term referred to? Well the term generally referred to the financing for new often risky adventures. So simply put the venture capitalists are people with money and they finance high-risk key ventures. Now why are we saying high-risk key ventures? Because when you have an idea, when you have some idea for a business the first thing you do you're going to use your own money. If you don't have money you're going to ask your family. If your family don't have money you might ask friends. Then if you go to the bank and you don't have any money then the banks aren't going to give you any money. So venture capitalists if you have a good idea they will look into it. So individual venture capitalists, investor money, investor own money, they're called angels okay are usually individuals, venture capital investors but they tend to specialize in small deals. Now bear in mind Google was a small deal but you would have been very lucky if you invested in Google. The venture capital firm which companies specialize in pooling funds from various sources and invest in them. Now if there's a venture capital individual and also you have firms it doesn't matter. It's someone who's going to give you money. So they bring money from a lot of places to pull their money together. Individuals, pension funds, insurance companies, large corporation, even university endowment funds. But we have to understand think of venture capital as private equity. What do I mean by private equity? Private equity means the company is not publicly traded therefore we need money and we cannot go to the public. Therefore we have to go to people with money that might help us. Now bear in mind those venture capitalists are risk takers. So what they do they'll try to limit the risk at any point they have. Because remember they may invest in one in 10 investments and only one does well, one investment does well. So they have to be very careful. So they generally provide financing in stages. They don't give you the money upfront. What they do they'll give you money in stages. So for example at the first stage, the first stage, they might finance you enough to have a prototype and a manufacturing plan. So do you have a viable product? Do you have a plan for a manufacturing facility? Well if you have a prototype, a viable product, maybe on the second stage they will put more money and they will help you begin manufacturing, marketing, and distribution. And there might be many stages each of which represent a key step in the process of growing the business and as they move closer and closer to reality also the owner of the business, the person with the idea also succeed with them as well. But they're the risk takers. There's something called seeds money and mezzanine. So some venture capital, capital firms they often specialize in different stages. Some of them they just get involved themselves in the early stages of the company or the ground floor financing. And some seed money, they obviously wait until the company is a little bit in later stages and they invest in there. Now obviously if you invest early on the return is higher generally speaking because you are taking more risk. If I ask you to buy this flower, invest in this flower or in this flower which one would you prefer? Obviously this is better because it's already grown. But if you invest in this one, you may ask for a higher return. Now venture capitalists, they want to make sure you're motivated, you're going to work for them. So the fact that they finance you in stages, that's going to give you motivation to keep you on pace, to keep the founder on pace. So often time the founder don't receive any salary or little salary and what they do, they tie up your personal assets to make sure you are invested with them because they again, they're giving you money. In addition to providing you finances, they often participate in running the firm, providing you with the benefit of experience with previous startup as well as general business expertise. Those individuals, the reason they have money is because they did well in life. In order to do well in life, generally speaking, you have to have some experience. You went through some tough situation and you surpassed it and you succeeded. This is especially true when the firm or when the firm founder, which is the person with the idea, don't know how to run a company, they have a good idea, but they don't know how to run the company. Now, let's talk about venture capital realities. They're not everywhere and they actually be out everywhere, but access to them is very limited. So if you're a venture capitalist, you could be lucky. Why? Because you have access to money, you have access to power. So venture capital receive a huge number of insulated proposal because anybody with an idea, they want money for it. They think their idea is great. So what happens is they don't look at every single idea. They rely heavily on networks of lawyers, accountant, bankers, and this is where networking is an important part of your career. You have the network. You have to network with accountant, lawyers, bankers, anyone with some power because they can connect you later on when the need be. So personal contact are important in gaining access to venture capital. It's very much an introduction market. So basically I introduce you and usually a word of mouth is pretty, pretty powerful. We have to keep in mind venture capitalists, they have money, but they are incredibly expensive and that's why they're incredibly expensive because they have the money. Everybody is going after them. That's why you're going after them. So sometimes what they do, they could ask you up to 40 or more than 40% equity of your business. So if you want to start business with them, you have a great idea. Well, guess what? 40% of your company is gone up front, if not 50%. So even though it's your idea, but you need the money. If you don't want it, somebody else, they will invest with somebody else. They also, they won't also prefer stock, given them priorities in case the company sold or liquidated. Sometimes they ask for to be on the board of directors, they ask for several seats and they may appoint one or two senior management that they trust, that they want to run the company. So venture capital is expensive, simply put, is expensive. Now we have to keep in mind there's different type of venture capitalists, not only one type. Now if you have the luxury to select ones, if you have a really good idea and if you are successful, they're also going to be looking after you. But if you are really successful, you may not need them because you might have the money. So it's basically, but let's assume you have the luxury, you have to look at different venture capitalists. Sometimes you may need the financial strength. So you want to look at someone who got a lot of money. Why? Because you don't want to think about the now. You also want to think about later. Later you may need more money to grow. So the venture capitalist needs to have resources and financial reserve, not only for this stage, but for future stages. Also, style is important. You don't want to work with a venture capitalist if that's not your style. So some individuals, some venture capitalists, they will wish to be much involved in a day-to-day operation of your business. They're there every day, they're looking over your shoulder and some they might be okay with monthly or quarterly report. Now which one is better? It depends on many things. For example, if you need to do business skills, you want them to be there. You want them to be there. You want them to be there. Also, bear in mind that small venture capitalists, they have less bureaucratic structure versus large ones. Large ones, so you have to keep that in mind as well. So if you want to make a quick decision, you're working with a large firm, it's not going to be easy to get a decision done. References are important. You want to look at the resumes. Do they have any experience in the business that you are in? Has the venture capitalist been successful with a similar firm? Of equal importance, how has the venture capitalist dealt with a situation that didn't work out? So what happened if things didn't work out as expected? They failed in their venture capitalist. Sometimes you want to take a look at their network. How can they help you? I mean, they can help you give you money, but also how connected are they? They might be able to help you in many different ways than just financing and management. They can introduce you to new customers, suppliers, other industry expert or contact. And venture capitalists frequently specialize in a few particular industries. So you want to go to that industry if you can find a venture capitalist in that industry. And that's very, very, very powerful and very valuable for you as a business owner or as an entrepreneur. Also, you want to think about what exit strategy do they want, okay? Venture capitalists are generally not long-term investors because they want to go in, make quick money, go somewhere else and make more money. So you want to know under what circumstances they're going to cash out and leave you. That type of thing will be agreed upon upfront, but the point is you want to, before you go through stages, you want to see what type of venture capitalist you're dealing with. So those are the different type of venture capitalist. In the next session, we would look at selling securities to public and look at the basic procedure. Once again, if you have any questions, email me. I strongly suggest you visit my website for additional lectures, additional lectures. And, you know, if you want to invest more in your career, you know, I strongly suggest you subscribe because you'll have access to a lot of resources. Good luck. Study hard.