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actual money held back in reserve in bank accounts or elsewhere。 Reserves
e from retained profits over many years but are reinvested in buildings；
equipment； stocks or pany debts； just like any other source of capital；
and are rarely held in cash。
The main categories of reserves are as follows：
。 Profit and loss account； ie cumulative retained profits from ordinary
trading activities。
。 Revaluation reserves； being the paper…profit that can arise if certain
assets are revalued to current price levels without the assets concerned
being sold。
。 Share premium account； ie the excess over the original par value of a
share when new shares are offered for sale at an enhanced price。 Only
the original par value is ever shown as issued share capital。
SOURCES OF EQUITY CAPITAL
There are two broad sources of equity： private equity； usually put in by
individuals or small groups of individuals who for hopefully the prospects
of greater returns will take on greater risks； or public capital through a
share issue on a stock market。
62 The Thirty…Day MBA
Private equity
There are three main sources of private equity： business angels； venture
capital firms and corporate venture funding。
Business angels
One likely first source of equity or risk capital will be a private individual
with his or her own funds； and perhaps some knowledge of your type of
business。 In return for a share in the business； such investors will put in
money at their own risk。 They have been christened ‘business angels’； a
term first coined to describe private wealthy individuals who back a play
on Broadway or in London’s West End。
Most angels are determined upon some involvement beyond merely
signing a cheque and may hope to play a part in your business in some way。
They are hoping for big rewards – one angel who backed Sage with ￡10；000
in its first round of ￡250；000 financing saw his stake rise to ￡40 million。
These angels frequently operate through managed networks； usually
on the internet。 In the UK and the United States there are hundreds of
networks； with tens of thousands of business angels prepared to put up
several billion pounds each year into new or small businesses。
Finding a business angel
The British Business Angels Association （bbaa。uk） has an online
directory of UK business angels。 The European Business Angels Network
（eban） has directories of national business angel associations both inside
and outside of Europe at （eban 》 Members） from which you can
find individual business angels。
Venture capital
Venture capital （VC） providers are investing other people’s money； o。。en
from pension funds。 They have a different agenda from that of business
angels； and are more likely to be interested in investing more money for a
larger stake。
In general； VCs expect their investment to have paid off within seven
years； but they are hardened realists。 Two in every 10 investments they
make are total write…offs； and six perform averagely well at best。 So； the one
star in every 10 investments they make has to cover a lot of duds。 VCs have
a target rate of return of 30 per cent plus； to cover this poor hit rate。
Raising venture capital is not a cheap option and deals are not quick to
arrange either。 Six months is not unusual； and over a year has been known。
Every VC has a deal done in six weeks in its portfolio； but that truly is the
exception。
Finance 63
Finding venture capital
The British Venture Capital Association （bvca。uk） and the European
Venture Capital Association （evca） both have online
directories giving details of hundreds of venture capital providers。 The
Australian Government （austradeict。gov。au/Globl…VC…directory/
default。aspx） has a global venture capital directory on this website and the
National Venture Capital Association in the United States has directories
of international venture capital associations both inside and outside the
United States （nvca 》 Resources）。
You can see how those negotiating with or receiving venture capital rate
the firm in question at The Funded website （thefunded） in terms
of the deal offered； the firm’s apparent petence and how good they
are managing the relationship。 There is also a link to the VC’s website。 The
Funded has 2；500 members。
Corporate venturing
Venture capital firms o。。en get their hands dirty taking a hand in the
management of the businesses they invest in。 Another type of business is
also in the risk capital business； without it necessarily being their main line
of business。 These firms； known as corporate venturers； usually want an
inside track to new developments in and around the edges of their own
fields of interest。 For example； Microso。。； Cisco and Apple have billions of
dollars invested in hundreds of small entrepreneurial firms； taking stakes
from a few hundred thousand dollars up to hundreds of million。
And it’s not just high…tech business that take this approach。 McDonald’s
held a 33 per cent stake in Prêt à Manger while it worked out where to take
its business a。。er saturating the burger market。 HM Revenue and Customs
（hmrc。gov。uk/guidance/cvs。htm） has a useful guide entitled ‘The
Corporate Venturing Scheme’； explaining the scheme； tax implications and
sources of further information。
Private capital preliminaries
Two important stages will be gone through before a private investor will
put cash into a business。 The emphasis put on these stages will vary according
to the plexity of the deal； the amount of money and the legal
ownership of the funds concerned。 For example； a business angel investing
on their own account can accept greater uncertainty than； say； a venture
capital fund using a pension fund’s money。
Due diligence
Usually； a。。er a private equity firm signs a le。。er of intent to provide capital
and you accept； it will conduct a due diligence investigation of both the
management and the pany。 During this period the private equity firm
64 The Thirty…Day MBA
will have access to all financial and other records； facilities； employees
etc to investigate before finalizing the deal。 The material to be examined
will include copies of all leases； contracts and loan agreements in addition
to copious financial records and statements。 It will want to see any management
reports； such as sales reports； inventory records； detailed lists of
assets； facility maintenance records； aged receivables and payables reports；
employee organization charts； payroll and benefits records； customer
records and marketing materials。 It will want to know about any pending
litigation； tax audits or insurance disputes。 Depending on the nature
of the business； it might also consider ge。。ing an environmental audit
and an insurance check…up。 The sting in the due diligence tail is that the
current owners of the business will be required to personally warrant that
everything they have said or revealed is both true and plete。 In the
event that proves not to be so； they will be personally liable to the extent of
any loss incurred by those buying the shares。
Term sheet
A term sheet is a funding offer from a capital provider。 It lays out the amount
of an investment and the conditions under which the new investors expect
the business owners to work using their money。
The first page of the term sheet states the amount offered and the form
of the funds （a bond； mon stock； preferred stock； a promissory note
or a bination of these）。 A price； either per ￡1；000 unit of debt or per
share of stock； is quoted to set the cost basis for investors ‘ge。。ing in’ on
your pany。 Later that starting price will be very important in deciding
capital gains and any taxes due at acquisition； IPO （initial public offering）
or shares/units transferred。
Another key ponent of the term sheet is the ‘post…closing capitalization’。
That is the proposed cash value of the venture on the day the terms
are accepted。 For example； investors may offer ￡500；000 in Series A preferred
stock at 50 pence per share （1 million shares） with a post…closing cap
of ￡2 million。 This translates into a 25 per cent ownership stake in the firm
（￡500；000 divided by ￡2 million）。
The next section of the term sheet is typically a table that summarizes the
capital structure of your pany。 Investors generally start with preferred
stock in order to gain a priority of distribution； should the enterprise fail
and the liquidation of assets occur。 The typical way to handle this is to have
the preferred stock be convertible into mon stock on a 1 ： 1 ratio at the
investors’ option； such that the preferred position is essentially a mon
stock position； but with priority of repayment over the founders’ own
mon…stock position。
Other terms included on the sheet could cover rents； equipment； levels
of debt vs equity； minimum and maximum time periods associated with
Finance 65
the transfer of shares； vesting in additional shares； and option periods for
making subsequent investments and having ‘right of first refusal’ when
other rounds of funding are sought in the future。
Public capital
Stock markets are the place where serious businesses raise serious money。
It’s possible to raise anything from a few million to tens of billions； expect
the costs and efforts in ge。。ing listed to match those stellar figures。 The
basic idea is that owners sell shares in their businesses that in effect bring
in a whole ra。。 of new ‘owners’ who in turn have a stake in the businesses’
future profits。 When they want out； they sell their shares on to other
investors。 The share price moves up and down to ensure that there are as
many buyers as sellers at any one time。
Going public also puts a stamp of respectability on you and your pany。
It will enhance the status and credibility of your business； and it will
enable you to borrow more against the ‘security’ provided by your new
shareholders； should you so wish。 Your shares will also provide an a。。ractive
way to retain and motivate key staff。 If they are given； or rather are allowed
to earn； share options at discounted prices； they too can participate in the
capital gains you are making。 With a public share listing you can now join
in the takeover and asset…stripping game。 When your share price is high
and things are going well you can look out for weaker firms to gobble up
– and all you have to do is to offer them more of your shares in return for
theirs。 You do not even have to find real money。 But of course this is a twosided
game and you also may now bee the target of a hostile bid。
You may find that being in the public eye not only cramps your style but
fills up your engagement diary too。 Most CEOs of public panies find
that they have to spend up to a quarter of their time ‘in the City’ explaining
their strategies； in the months preceding and the first years following their
going public。 It is not unusual for so much management time to have been
devoted to answering accountants’ and stockbrokers’ questions that there is
not enough time to run the day…to…day business； and profits drop as a direct
consequence。
The City also creates its own ‘pressure’ both to seduce panies onto
the market and then by expecting them to perform beyond any reasonable
expectation。 There have been a number of high…profile examples of panies
that have floated their shares on a stock market then changed their
minds and withdrawn； buying out all outside shareholders。 The rationale
for taking a pany private is that the buyer feels that they can run the
pany be。。er without the need to justify their decisions to other shareholders；
or the plex and burdensome regulations that public panies
must ply with。
66 The Thirty…Day MBA
The Saga saga
The name that is synonymous with providing holidays exclusively for
the over…50s is undoubtedly Saga’s。 The business； started in 1951 with the
daunting name of ‘Old People’s Travel Bureau’； was an experiment by
Folkestone hotelier Sidney De Haan。 He believed that older holidaymakers
would appreciate a quieter off…season break by the sea； charging just ￡6。10s；
including travel； full board and three excursions。 Over the next decade the
pany chartered trains； planes and finally bought its own charter boat；
the Saga Rose。 Along the way it launched a magazine； insurance business
and a clutch of FM radio stations。 Over a third of the UK’s over…50s are on
Saga’s database； which holds 7 million individuals of whom over 2 million
actively buy from Saga each year。 By January 2007 the pany was making
￡158。2m in profits and employing 3；800 people worldwide。
The pany’s financing history has been something of a rollercoaster。
Initially financed using family money and bank debt； the firm was floated
on the stock market in 1978。 Saga was not a hit with investors though；
partly because of the weakening UK holiday market。 The De Haan family
took the group private in 1990； buying out all the other investors。 By 2004
the pany was preparing to go back onto the stock market when the
private equity firm； Charterhouse Capital Partners； paid ￡1。35 billion to
take control of the group and