Question: Explain the difference between a seed investment and a start-up investment and how they compare on risk considerations

1. With a background in the sector gained as a consultant with a major professional services firm you are considering raising a new venture capital fund to invest in digital health technology and medical equipment and devices.
(a) Describe how you might go about raising this fund including who you would approach as potential investors in the fund, which type of adviser that you might involve in the fund-raising process and the various steps and proposed timeline for the fund raising. (20 marks)
(b) Explain what you would include in the executive summary of the document that you would use to market the fund to potential investors. (5 marks)
(c) Explain what you would include in the “track record” section of this document and provide an example of a tabular summary statement of a fund’s track record. (10 marks)
(d) Explain why it may be more difficult to raise this first-time fund than a subsequent fund. (5 marks)
(e) What is the difference between “allocated capital” and “committed capital”? (5 marks)
(f) Explain what is meant by a “first close” and why it is usually easier to complete the fund raising once a first close has been reached. (5 marks)
(50 marks total)

2. As a partner with a venture capital firm that specialises in the food and hospitality sector you have received a business plan from a management team that is aiming to raise finance to start-up a chain of premium burger restaurants.
(a) Explain, in some detail, how you would go about appraising this investment opportunity from receipt of the business plan to issuing an offer letter (term sheet) (20 marks)

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(b) How would you arrive at a valuation for the business and the equity stake that you would require (use a numerical example to illustrate your answer)? (15 marks)
(c) Why might you hold equity as preference shares rather than ordinary shares? (5 marks)
(d) Explain the purpose of the term sheet and whether it is a binding, legal contract in any way. (7 marks)
(e) What is meant by the term “consent rights”? (3 marks)

(50 marks total)
3. Over the past year private equity firms have been extremely active in financing management buy-outs (MBOs) of underperforming or undervalued businesses.
(a) Describe the criteria that a private equity firm would look for in a potential MBO opportunity. (10 marks)
(b) What risk factors might pertain to a private equity investment in the pandemic? (9 marks)
(c) Explain how a MBO deal is usually structured both in terms of its corporate / legal structure and its financial structure. (10 marks)
(d) If a private equity firm is considering investing in the MBO of a supermarket chain describe in detail the areas of external commercial due diligence, management due diligence and financial due diligence that should be carried out, making your answer specific to the supermarket sector (15 marks)
(e) What options would be available to the private equity firm if the due diligence revealed some issues? (6 marks)
(50 marks total)

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4. (a) Explain the difference between a seed investment and a start-up investment and how they compare on risk considerations. (6 marks)
(b) Both of these stages of investment are often financed initially by business angels. Explain the difference between a financial return business angel and a professional entrepreneur business angel. (8 marks)
(c) Why might a venture capitalist be keen to invest in a company that has already received a first round of business angel investment? (5 marks)
(d) Explain why an anti-dilution clause might be included in the investment agreement between the venture capitalist and / or business angel and the company receiving the investment. (4 marks)
(e) Following investment explain how both business angels and venture capitalists would go about monitoring an investment (11 marks)
(f) In what ways might they seek to add value to an investment prior to exit? (6 marks)
(g) Explain why it is necessary to exit from an investment and list the pros and cons to both a venture capitalist investor and the company’s management team of exiting via a trade sale and via a stock market flotation / IPO. (10 marks).