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.