Glossary

A

Added Value
Accretion generated by a venture capital company through its participations.

B

Beauty-Contest
Either the solicitation of a company planning an IPO by banks pursuing leadership of a consortium in the IPO, or - vice versa - the solicitation of banks by a company with the goal of enlisting a consortium leader.

Bookbuilding
A procedure to determine the price of new stock. Before the IPO, the subscription intentions of potential investors are recorded by the assisting banks. Reflecting the demand, a range is established within which the final issue price will be determined.

Borrowed capital
Capital which is subject to liabilities (e.g. payments of interest and principal). As opposed to equity capital, the entrepreneur has to provide the lender with corresponding securities. Outside financing places a heavy burden on a new company’s liquidity since loans must be repaid on time even if the company is incurring losses.

Break-even-Point
Point in time when a company turns the profit corner.

Burn rate
Speed at which the capital is used up.

Business Angel
A wealthy individual who provides young entrepreneurs with capital, management know-how and business contacts. Business angels frequently invest parallel to venture capital companies.

Businessplan
The business plan is a company’s documentation of its product and/or service idea, market potential, company strategy, management, required capital, as well as financial planning for the next 3-5 years.

C

Co-Venturing
The integration of additional investors to reduce investment risk. The rule of thumb is that venture capital companies do not invest more than 10% of a fund in a given venture.

Consortium
The group of banks assisting in the IPO.

Consortium leader:
The company in charge of a company’s IPO.

D

Deal
In-depth inquiry at a venture capital company.

Dealflow
Total incoming inquiries at a venture capital company.

Due Diligence
An investment review lasting approximately 3-6 months. It starts with a general analysis of the business plan and, if the outcome is positive, continues with a detailed analysis where both the company and the market and technology potential are thoroughly examined. Intense talks with management and on-site visits take place during this phase. Most rejections occur during general analysis because either the business idea does not match the investment strategy of the venture capital company or there is little likelihood that the company will succeed and grow sufficiently.

E

Early stage financing

Equity capital
The net capital of the company which is either generated through outside (venture) capital or through operational value creation processes. The equity capital provider has only result-dependent payment claims. If a company incurs losses, those will be set off against the equity capital. The equity capital provider’s invested capital is also subject to liability to creditors.

Exit
Termination of the investors’ participation through the sale of interest in the company to realize the profit of the investment.

Expansion financing
Capital for the expansion of capacities and entrance into new markets.

Exit channels
There are several common options for the exit of investors: going public (IPO), sale to a third party, repurchase by the existing shareholders (buy-back).

F

Financing stages
The following distinct funding stages exist:


Seed financing:
Usually only the business idea (business plan) exists during this stage.
Start-up financing:
A company’s formation period during which product development and the first marketing steps are financed.
Early-Stage financing:
Capital for the early stage of a company when product development has been completed but no profits have been realized yet.
Expansion financing:
Capital for the expansion of capacities and entrance into new markets.
Second- or Later-Stage financing:
Inflow of capital after the first phase of marketing.
Incubator:
Companies that provide new firms with infrastructure, consulting and first seed capital in exchange for company shares.
Mezzanine financing:
Financing round during the intermediate development stage of a new company - usually the last round before the IPO (and consequently before the bridge financing), also called third stage financing.
Bridge financing:
Readying a company for the IPO.

Fund Raising
Fundraising is the process of soliciting and gathering money or other gifts in kind by requesting donations from individuals, businesses, charitable foundations, or governmental agencies. Although fundraising typically refers to efforts to gather funds for not-for-profit organizations, it is sometimes used to refer to the identification and solicitation of investors or other sources of capital for for-profit enterprises.

G

Greenshoe
The shareholders retain a certain reserve of stock at the time of the IPO to avoid an “overheating” of demand. In the event of an oversubscription, this reserve will then be issued as well. It serves to prevent the share price from both reaching astronomical heights at the IPO due to the great demand and shortly afterwards facing a cave in just as rapidly.

I

Independent Fund
Fund of an independent venture capital company not controlled by a finance or industry group.

IPO
Initial public offering - a company’s first offering of stock to the public (the general public has the opportunity to invest in the company by buying shares of stock).

K

Kleine AG
With the Kleine AG the German legislature created not a new legal form, but simply purposeful easements and deregulation, primarily for the not listed companies. The measures comprise amongst other things the stabilization of the autonomy of the articles of the company regarding the use of profits, the permission of the one-person establishment, simplification of the lead time of the summoning and execution of the general meeting as well as the exemption of worker’s participation.

L

Later-Stage financing
Inflow of capital after the first phase of marketing.

M

MBI
Take-over of the company by an external management (management buy-in).

MBO
Take-over of the company by the existing management (management buy-out).

O

Oversubscription
If demand for a certain stock is higher than the volume of issued shares, the stock is oversubscribed. Stock is oversubscribed a hundred times when the demand exceeds the available shares a hundred times.

P

Portfolio
Portfolio, in finance, is a collection of investments held by an institution or a private individual. Holding a portfolio is often part of an investment and risk-limiting strategy called diversification. By owning several assets, certain types of risk (in particular specific risk) can be reduced.

Post-money valuation
Value of a company after a round of financing.

Pre-money valuation
Value of a company before a round of financing.

Private Equity
Equity capital provided to companies for development of new products or technologies, strengthening of the capital base or for acquisitions. The term is used to describe any financing before an IPO, particularly MBOs and MBIs.

S

Seed financing
Usually only the business idea (business plan) exists during this stage.

Soft money
Capital without profit requirements (from public agencies, foundations, etc.).

Squeeze out
A procedure which allows majority shareholders to squeeze small shareholders out of the company by the payment of a cash settlement. This is permitted in Germany if the majority amounts to 95 % or more.

Start up financing
A company’s formation period in which product development and the first marketing steps are financed.

Subscription period
A specific time period before the official IPO in which shares may be purchased (subscribed).

Syndication
Joining of several venture capital companies to reduce investment risks.

T

Track record
Success and experience history of a company or joint venture.

Turn around
Restructuring/financing of companies after they have overcome previously existing problems.

V

Venture Capital
Equity capital of investors to finance new, fast-growing companies, also called venture or risk capital. This term is used in the USA only to describe financing of fast-growing companies during the early stages, in Europe, however, it is sometimes used as a generic term for any type of financing.

Venture capital investment
A venture capital company participates in a company with capital in return for partnership interest. Usually, those are minority interests of up to 49%. The goal is to sell the interest after several years at a profit - since only then was the investment worthwhile.

Venture capital fund

A fund providing capital for the investments. Investors of the fund are both institutional investors (financial institutions, insurance companies, government agencies, pension funds) and individuals.