Chapter 1: About this book

Venture Capital (VC) and Private Equity (PE) have become increasingly prominent sources of capital for unlisted companies. VC funds usually target earlier stage investments. PE funds usually target later stage companies. PE activities include leveraged buyouts (LBOs). VC and PE funds themselves raise money from outside investors, called Limited Partners (LPs). Other capital sources supplement VC and PE. These include angel investors and equity crowdfunding.

This book discusses VC, PE, and investments in unlisted companies. The book considers several important topics. We provide an overview of unlisted companies’ access to capital. We also start by discussing what VC and PE funds do (in general), where they obtain their money, and what they invest in.

The book then further discusses the contracting problems that arise when investing in unlisted companies. This includes an overview of the agency conflicts, moral hazard, and information asymmetry. We then discuss ways to confront some of these issues. This includes through due diligence, staging, tranching, and syndication.

We also discuss how VC and PE funds overcome these issues through various terms that they might include in a “term sheet”, which should ultimately be included in the “shareholders’ agreement”.

This book further discusses common valuation methods. This includes relative valuation, and discounted cash flow valuation. We also discuss engineering a goal valuation by targeting a goal IRR. While early stage valuations are often based simply on comparable deals, these valuation methods can be especially appropriate for later stage valuations.

We also look at how VC and PE funds exit their investments. Here, we discuss IPOs, takeovers, and secondary sales to other VC and PE funds. This includes a discussion of the relative advantages and disadvantages of each exit type.

This book also looks at VC and PE performance and their relationship with their investors (“Limited Partners”, or “LPs”). We discuss how VC and PE funds raise money, their fee structures, and what LPs might look for in funds. This includes considering how VC and PE funds commonly perform and the factors that might influence VC and PE funds’ performance.