Venture Capital Investing: The Complete Handbook for Investing in Private Businesses for…

Paperback | August 13, 2003

byDavid Gladstone, Laura Gladstone

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In his classic bestseller Venture Capital Handbook, leading venture capitalist David Gladstone showed thousands of companies how to get funding and work with early stage investors. Now, in his revision of the classic, Venture Capital Investing, he looks at venture capital through the eyes of the investor. Gladstone shows all of you VC investors and angels exactly how to weed through scores of business proposals and find the gem that will deliver outstanding returns, especially in these soft economic times. You will learn what to look for in a business proposition; how to assess entrepreneurs and their management teams; how to evaluate financial statements, market niches, competitive environments, and product innovations; how to investigate a business that's already operating; and how to build effective partnerships with existing portfolio companies.

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From the Publisher

In his classic bestseller Venture Capital Handbook, leading venture capitalist David Gladstone showed thousands of companies how to get funding and work with early stage investors. Now, in his revision of the classic, Venture Capital Investing, he looks at venture capital through the eyes of the investor. Gladstone shows all of you VC ...

From the Jacket

In his classic bestseller Venture Capital Handbook, leading venture capitalist David Gladstone showed thousands of companies how to get funding and work with early stage investors. Now, in his revision of the classic, Venture Capital Investing, he looks at venture capital through the eyes of the investor. Gladstone shows all of you VC ...

DAVID GLADSTONE founded Gladstone Capital and serves as its CEO and Chairman. He previously served as Chairman of American Capital Strategies, the largest public-traded leveraged buyout fund, and was past Chairman of Allied Capital, the largest public-traded mezzanine debt fund. With Laura Gladstone he wrote the classic book on obtaini...

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Format:PaperbackDimensions:528 pages, 8.8 × 5.9 × 1.1 inPublished:August 13, 2003Publisher:Pearson EducationLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:013101885X

ISBN - 13:9780131018853

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From the Author

IntroductionThis book has been great fun to write, and with this revision it is ready for another 15year run. More than 500 venture capital, buyout, and mezzanine funds are using the book to enlighten their new investment officers, associates, and analysts. When the book was written 15 years ago, there was no prediction that Venture Capital Investing would become so widely used by professionals in the industry. However, with the tremendous increase in venture capital and the many new employees, the book has benefited by filling that need. Please note that throughout this book, we use the term venture capital to cover the areas often called private equity investing. Under this general term, venture capital, we are lumping investing in leveraged buyouts, investing in startups, and providing growth financing (mezzanine finance).The chief strength of the book is that it is a "nutsandbolts" approach about how to invest in venture capital and should illustrate to you the pragmatic process of investing in venture capital. The style is in plain English about the basics and does not have a lot of theory or war stories. It shows you how to win at the game of investing in venture capital. It has been gratifying to see the book become so useful to so many people in the venture capital industry. Some people have claimed to have gained great insight into a particular investment and helped the venture capital fund make extraordinary returns. (We are waiting for some of those big winners to send us the commissions!) It would be fun to know how many billions of dollars have been made from venture capital firms by using this book. We know the book is having an impact because some of our venture capital friends make comments to us about "giving away the secrets of the business." It seems that we have made it more difficult for them to gain the advantage over some of the new funds that have been entering the venture capital marketplace. In addition to professionals, more than 60 business schools use this book in their classes on either investing or entrepreneurship. It is wonderful that there are so many business schools that use the book today. It is gratifying to know that people are studying how to invest in venture capital. Background on the AuthorsFor this new edition, David has teamed up with his daughter, Laura Gladstone, to rewrite this edition. We are authors by night, but both of us have day jobs as managers of a fund we created called Gladstone Capital Corporation (NASDAQ: GLAD). Our website is www.gladstonecapital.com. Come visit our website and learn about our fund and some more about venture capital.We have one warning to readers about the authors. Every person is the total of his or her experiences. Each of us brings to every situation intellectual "baggage" in the form of prejudices and preferences, inherited and learned from past experiences. Therefore, to understand what this book is about, you need to know something about the background of the writers.All of the experience of the writers has come from lending to and investing in small and mediumsized businesses. Neither of the writers of this book have been a professional in any other area, such as the arts and letters or politics. David Gladstone’s experience has come from investing in small and mediumsized businesses since 1973. He has invested in all stages of the process, from startup to laterstage and, in some cases, small public companies. He is the past chairman of the group of companies that are now consolidated under the name of Allied Capital Corporation, which is listed on the New York Stock Exchange (ALD). As the chairman of that company, he gave investors an annual return of 22.4 percent compounded per year for 15 years. That company increased dividends and distributions to shareholders every year while he was in charge of its investments. He invested in more than 500 companies and had more than 400 successful exits while running that fund. In 1997, David became chairman of American Capital Strategies, which is listed on NASDAQ (ACAS). Under his direction, that company grew from a tiny, private investment bank to a publicly traded buyout company with over $1 billion in market capitalization. During his fouryear tenure at American Capital, David gave investors over 25 percent return per year and increased dividends every year for the four years he was head of the firm. Although Laura’s background is in business, her experience has three distinct segmentsand it all relates to lending or investing in businesses. First, she was head of the marketing department at Allied Capital Corporation for three years, with responsibility for finding new venture capital investments. In that capacity, she found new investments for the fund all over the United States. She has seen thousands of new business proposals and met hundreds of entrepreneurs. She has spent most of her time looking at leveraged buyout opportunities and some of her time in early stage ventures. Next, Laura worked for HSBC, a large multinational bank, where she made loans to many different types of businesses in various industries both in the United States and in Latin America. In this area, she developed her credit skills and approached business from a lender’s perspective. She looked at them with a view for their ability to enerate cash flow, one of the most critical elements of any business. Finally, she worked on the sell side on Wall Street as an associate analyst covering the telecommunications industry for two of Wall Street’s largest brokerage houses. In this job, she developed her ability to pick stocks and analyze equity situations. At these three different types of jobs, Laura learned financial modeling, analyses of companies, and the allimportant due diligence in many different types of scenarios. In 2001, Laura helped found Gladstone Capital Corporation, where she is a principal, making loans and investments in small and mediumsized businesses. David Gladstone and Laura Gladstone are the authors of their first book, Venture Capital Handbook, which helps a small business entrepreneur understand the basics of raising capital for a new idea or business. This second book, Venture Capital Investing, is not a sequel but instead takes a look at investing through the eyes of the venture capitalist. This book seeks to give understanding about investing in a successful entrepreneur and how to weed through endless business proposals to find the gem of all opportunities. What does it take to find a successful business venture and how does one invest? That is what we hope to answer in this book.The structure of the book is sequential; that is, it begins with the due diligence process and proceeds through the closing, the monitoring of the investment, and finally the exit.

Read from the Book

Introduction This book has been great fun to write, and with this revision it is ready for another 15-year run. More than 500 venture capital, buyout, and mezzanine funds are using the book to enlighten their new investment officers, associates, and analysts. When the book was written 15 years ago, there was no prediction that Venture Capital Investing would become so widely used by professionals in the industry. However, with the tremendous increase in venture capital and the many new employees, the book has benefited by filling that need. Please note that throughout this book, we use the term venture capital to cover the areas often called private equity investing. Under this general term, venture capital, we are lumping investing in leveraged buyouts, investing in startups, and providing growth financing (mezzanine finance). The chief strength of the book is that it is a "nuts-and-bolts" approach about how to invest in venture capital and should illustrate to you the pragmatic process of investing in venture capital. The style is in plain English about the basics and does not have a lot of theory or war stories. It shows you how to win at the game of investing in venture capital. It has been gratifying to see the book become so useful to so many people in the venture capital industry. Some people have claimed to have gained great insight into a particular investment and helped the venture capital fund make extraordinary returns. (We are waiting for some of those big winners to send us the commissions!) It would be fun to know how many billions of dollars have been made from venture capital firms by using this book. We know the book is having an impact because some of our venture capital friends make comments to us about "giving away the secrets of the business." It seems that we have made it more difficult for them to gain the advantage over some of the new funds that have been entering the venture capital marketplace. In addition to professionals, more than 60 business schools use this book in their classes on either investing or entrepreneurship. It is wonderful that there are so many business schools that use the book today. It is gratifying to know that people are studying how to invest in venture capital. Background on the Authors For this new edition, David has teamed up with his daughter, Laura Gladstone, to rewrite this edition. We are authors by night, but both of us have day jobs as managers of a fund we created called Gladstone Capital Corporation (NASDAQ: GLAD). Our website is www.gladstonecapital.com. Come visit our website and learn about our fund and some more about venture capital. We have one warning to readers about the authors. Every person is the total of his or her experiences. Each of us brings to every situation intellectual "baggage" in the form of prejudices and preferences, inherited and learned from past experiences. Therefore, to understand what this book is about, you need to know something about the background of the writers. All of the experience of the writers has come from lending to and investing in small- and medium-sized businesses. Neither of the writers of this book have been a professional in any other area, such as the arts and letters or politics. David Gladstone's experience has come from investing in small- and medium-sized businesses since 1973. He has invested in all stages of the process, from startup to later-stage and, in some cases, small public companies. He is the past chairman of the group of companies that are now consolidated under the name of Allied Capital Corporation, which is listed on the New York Stock Exchange (ALD). As the chairman of that company, he gave investors an annual return of 22.4 percent compounded per year for 15 years. That company increased dividends and distributions to shareholders every year while he was in charge of its investments. He invested in more than 500 companies and had more than 400 successful exits while running that fund. In 1997, David became chairman of American Capital Strategies, which is listed on NASDAQ (ACAS). Under his direction, that company grew from a tiny, private investment bank to a publicly traded buyout company with over $1 billion in market capitalization. During his four-year tenure at American Capital, David gave investors over 25 percent return per year and increased dividends every year for the four years he was head of the firm. Although Laura's background is in business, her experience has three distinct segments--and it all relates to lending or investing in businesses. First, she was head of the marketing department at Allied Capital Corporation for three years, with responsibility for finding new venture capital investments. In that capacity, she found new investments for the fund all over the United States. She has seen thousands of new business proposals and met hundreds of entrepreneurs. She has spent most of her time looking at leveraged buyout opportunities and some of her time in early stage ventures. Next, Laura worked for HSBC, a large multinational bank, where she made loans to many different types of businesses in various industries both in the United States and in Latin America. In this area, she developed her credit skills and approached business from a lender's perspective. She looked at them with a view for their ability to enerate cash flow, one of the most critical elements of any business. Finally, she worked on the sell side on Wall Street as an associate analyst covering the telecommunications industry for two of Wall Street's largest brokerage houses. In this job, she developed her ability to pick stocks and analyze equity situations. At these three different types of jobs, Laura learned financial modeling, analyses of companies, and the all-important due diligence in many different types of scenarios. In 2001, Laura helped found Gladstone Capital Corporation, where she is a principal, making loans and investments in small- and medium-sized businesses. David Gladstone and Laura Gladstone are the authors of their first book, Venture Capital Handbook, which helps a small business entrepreneur understand the basics of raising capital for a new idea or business. This second book, Venture Capital Investing, is not a sequel but instead takes a look at investing through the eyes of the venture capitalist. This book seeks to give understanding about investing in a successful entrepreneur and how to weed through endless business proposals to find the gem of all opportunities. What does it take to find a successful business venture and how does one invest? That is what we hope to answer in this book. The structure of the book is sequential; that is, it begins with the due diligence process and proceeds through the closing, the monitoring of the investment, and finally the exit.

Table of Contents



Introduction.


1. Keys to Successful Investing.

What Are the Basic Items to Look for in a Business Proposition? It's Not an Investment, It's a Partnership. Prepare a Written Summary before You Begin to Invest. What Does A Summary Look Like? Some Words about Franchising. Summary—Quick Standards of Venture Capital Investing.



2. Analysis of Management.

The Study of Entrepreneurs. Characteristics of Entrepreneurs. How We See Entrepreneurs. Interviewing Entrepreneurs. Assessment of Entrepreneurs. What Venture Capitalists Look for in Entrepreneurs. Characteristics of Small Business Managers versus Entrepreneurs. Conclusions on Entrepreneurs. Developing Background Information. Final Judgment.



3. Reviewing Personnel and Compensation.

How Is the Company Organized? How Are People Compensated? What Employment Contracts Exist? What Is the Workforce Structure? What Personnel Records Are Maintained? Major Strengths and Weaknesses.



4. Analysis of Marketing and Sales.

Who Are the People Who Market and Sell? What Are They Selling? Who Buys the Product or Service? What Is Said to the Customer? What Is the Marketplace for the Product or Service? How Is Price Determined? What Internal Reports Are Made? What External Information Is Available? Basic Information. What Are the Strengths and Weaknesses?



5. Investigating Production.

The Facility. Equipment. Production Capacity. Production Employees. Regulatory Agencies. Subcontracting Work. Inventory. Quality Control. Production Costs. Production Levels. Back to Capacity. Strengths and Weaknesses of the Production Process. Purchasing Process. Receiving. Shipping. Customer Service. Research and Development. Basic Information. Conclusions about Production.



6. Analysis of the Financial Statements and Projections.

Personnel. Analysis of the Numbers. Budgeting and Control. Past Financings. Use of Proceeds. Projections. Basic Information. Conclusions on the Financial Area.



7. Reference Information.

Corporate Identification. Corporate Structure. Management Questions. Professional References. Credit Information. Conclusions on Reference Information.



8. Negotiating the Deal and Commitment Letter.

Pricing the Deal. Commitment Letters. An Investment Memorandum. Conclusions about the Commitment Letter.



9. The Legal Closing.

First Type of Closing: Loan with Options. Second Type of Closing: Legal Documents for the Purchase of Stock. Lawyers as Investors or Business Owners. Experienced Lawyers Are Best. Procedures for Reviewing Documents. Legal Fees Keep Going Up. How Lawyers Run up Your Legal Bill. The Closing: A Moment of Truth. What to Remember About Lawyers. Documentation.



10. Monitoring the Investment.

Involvement. Major Policy Decisions. Monthly Reports. Board Meetings/Investor Meetings. Other Discussion Items. Maintaining Good Records. Warning Signs. Why Entrepreneurs Have Financial Problems. Why Entrepreneurs Have People Problems. What to Do with Problems. Secret of a Successful Relationship. Degree of Involvement by the Venture Capitalist. Venture Capitalist Objectives.



11. The Exit.

Exit One: Going Public. Exit Two: Sale to a Strategic or Financial Buyer. Exit Three: Sale Back to the Company. Exit Four: Sale to Another Investor. Exit Five: Reorganizing the Company. Exit Six: Liquidation. When You Are in a Workout. Save Your Investment.



12. Finding Good Investments.

Developing an Investment objective. Originating Investment Opportunities. Proactivity. Handling Investment Opportunities. Using Brokers. Final Word.



Appendix A: Questions Used in Venture Capital Investigations.


Appendix B: Actual Documents.


Appendix C: List of Traits for Analysis of People.


Appendix D: Evaluation of an Entrepreneur by an Industrial Psychologist.


Index.