Venture Leasing - a smarter way to Build Enterprise Value
Waived in 2003 venture capitalists and investors about 18 billion U.S. dollars to promising young U.S. companies by VentureOne and Ernst & Young Quarterly Venture Capital Report. Less documented and reported is venture leasing activity and volume. This form of financing of equipment contributes significantly to the growth of U.S. start-ups. Yearly, specialty leasing companies pour hundreds of millions of dollars in start-ups and allows savvy entrepreneurs to the biggest "bang for the achievementtheir money in the financing of growth. What is venture leasing and how sophisticated entrepreneurs maximize enterprise value with this type of financing? Why would a venture leasing is cheaper and smarter way to finance needed equipment when compared to venture capital? For answers we must strictly to this relatively new and growing form of equipment financing specifically looking for rapidly growing venture capital-backed start-ups to develop.
The term venture leasing describes the leasing ofExtras for pre-profit start-ups by venture capital investors funded. These companies usually have negative cash flow and rely on additional equity rounds to fulfill their business plans. Venture leasing allows growing start-ups to acquire needed equipment while conserving expensive venture development capital. Equipment financed by venture leases usually includes essentials such as computers, laboratory and measuring technology, furniture, manufacturing and production facilities,and other devices to automate the Office.
With Venture Leasing is Smart
Venture leasing enjoys many advantages over traditional venture capital and bank financing. Financing new ventures is a high risk business. Venture capitalists typically demand substantial financial stakes in the companies to compensate them for this risk. They typically seek investment returns of at least 35% - 50% on their unsecured, non-equity amortized investments. An IPO or sale of otherinvest their equity position within three to six years, offering them the best way to capture this return. Many venture capitalists require board representation, exit time frames and / or the rights of investors to a "liquidity" event character. In comparison, venture leasing has none of these drawbacks. Venture owners typically seek an annual return in the 14% - 20% lie. These transactions usually amortize monthly in two to four years and are secured by the underlying assets. AlthoughRisk to the venture lessor is also high, this risk is mitigated by collateral and structuring a transaction to pay for that. By using venture leasing and venture capital together, the savvy entrepreneur lowers the venture total investment costs, builds enterprise value faster and retains ownership.
Venture leasing is also very flexible. By structuring a fair market value purchase or renewal option at the end of the tenancy of the start-up can slash monthly payments. Lower paymentslead to higher earnings and cash flow. Since a market value option is not required, the lessee has a high degree of flexibility and control. The resulting reduction in payments and shift of leasing costs over the course of the transaction can deliver a higher enterprise value of the savvy entrepreneur during the initial term of the lease. The higher enterprise value results from the start-up capacity, higher yields on the most votes can be reachedbased.
The customers benefit more from venture leasing as compared to traditional bank financing in two ways. First, venture leases are usually only secured by the underlying investments. In addition, there are usually no restrictive financial obligations. Most banks, if they give early stage companies that require blanket liens on all assets of the company. In some cases, they also require guarantees for start-up clients. More and more business leaders recognize that discerningstifling effects of these restrictions and their impact on growth. If start-ups and an additional financing of a single lender, all company assets or charge required guarantees, these young companies less attractive to other funding sources. The correction of this situation, the entrepreneur can sap time and energy.
How Venture Leasing Works
In general, raised a big round of equity capital from credible investors or venture capitalists makes venture leasing viable for theEarly Stage Company. Landlord structure most transactions as a master-leased lines and allows the tenant to move on to the lines as needed throughout the year. Lease lines usually lie in the order of only $ 200,000 to well over $ 5,000,000, according to the needs of the tenant and credit strength. Terms are usually between twenty-four to forty-eight months, payable monthly in advance. The tenant has the credit strength, quality and life of the underlying investments and the landlordanticipated ability to re-market the equipment during the lease often dictate the initial lease term. Although no lessor of lease agreement, expected market return of the equipment occurs before the expiration of the lease the tenant should the business fail, the lessor must pursue this path of recovery to salvage the transaction. Most venture leases give lessees flexible end-of-lease options. These options usually include the ability to buy the equipment, the lease at fair market value or extendReturn the equipment to the lessor. Many landlords limit the market value, in which even the tenant. Most leases require the tenant to the important equipment obligations such as maintenance, insurance and taxes to pay the necessary equipment shoulder.
Venture Landlord Tenant target that have good prospects, and promise are likely to fulfill their leases. Since most start-ups have on future equity rounds to execute their business plans, lessors devote significant attention toCredit and due-diligence - evaluating the caliber of the investor group, the effectiveness of the business plan and management background. A superior management team has usually demonstrated prior successes in the area in which the new enterprise is active. Moreover, management know-how in key business functions - sales, marketing, R & D is, production, engineering, finance --- is essential. While there are many professional venture capital financing of new enterprises,There is a significant difference in their abilities, staying power and resources. The better venture capitalists achieve excellent results and have direct experience with the type of businesses are financed. The best VCs have developed industry specialization and have many in-house specialists with direct operating experience in the industries covered. Also important are the owner of the venture capital VCs provide the start-up and the amount allocated to future fundingRounds.
After determining that the management team and venture capital investors are qualified, venture lessors to determine the start-up business model and market potential. Since most Venture owners are not technology specialists - able to assess products, technology, patents, business processes and the like - they rely heavily on the thorough due diligence of experienced venture capitalists. But the experienced venture lessor is not required to appoint an independent assessment ofBusiness plan and very accurate due diligence to understand its contents. Here, the rule seeks to understand the owner, and agree the business model. Questions must be answered: Is the business model make sense? How big is the market for services is planned or products? Are the income projections realistic? Is the pricing of the product or service sensible? How much cash on hand and how long it will be according to the projections of the past? When will the next round of equity capital is required?Are the key people needed execute the business plan in place? These and similar questions to determine whether the business model is reasonable.
Satisfied that the business model is sound, the venture lessor's biggest worry is whether the start-up adequate liquidity or support by hand to a significant portion of the rental period is. If that does not dare to raise additional capital or runs out of money, the landlord is not likely to continue to collect lease payments. To mitigatethis risk, the most experienced venture lessors pursue start-ups with less than nine months of cash or sufficient liquid assets to a significant part of their service leasing.
Getting the Best Deal
What determines venture lease amounts and how does a prospective lessee get the best deal? First, make sure you are comfortable with the leasing company. This relationship is usually more important than transaction volumes. With the rapid rise in venture leasing in the last ten yearsHandful of national leasing companies now specialize in venture leasing. A good venture lessor has a lot of expertise in this market, is accustom to working with start-ups, and is ready to help in difficult cash flow situations should the start-up stray from the plan. To deliver even the best venture lessors other value-added services - such as assisting in fixed assets at better prices, sale of existing equipment, finding additional venture capital sources, working capital lines,Factoring, temporary CFOs, and introductions to potential strategic partners.
After the start-up finds a capable venture lessor, negotiating a fair and competitive lease is the next order of business. A number of factors determine venture lease rates and terms. Important factors are: 1) the perceived credit strength of the tenant, 2) equipment quality, 3) market interest rates, and 4) competitive factors in the venture leasing market. Since the lease with more structuredOpportunities, many of which influence the ultimate lease cost, start-ups should compare competing proposals to lease. Owners typically structured leases to 14% - 20% yield. By developing end-of-lease options include better meet the needs of tenants, landlords can be a part of this amount of back-end of the lease is variation in the form of a fair market value or fixed purchase or renewal option. It is not uncommon for a three years structured so that lease 9% - 11% annually during the first term of the lease yield.After that decision, the lessee, the equipment back to extend the purchase of equipment for the 10% - 15% of the cost or the equipment, the lease for another year. If the lease is renewed, the lessor recovers an additional 10% - 15% of the cost of equipment. When the device is returned to the landlord, reduces the start-up costs and limits the amount paid under the lease. The lessor will then remarket the equipment in a 14% - 20% return goal.
Another possibility, leasing companies canjustify slashing lease payments is to incorporate warrants into shares to acquire the transaction. Warrants prior to the owner the right to buy an agreed quantity of the ownership share at a price set by the parties. Under a venture lease with warrant pricing, the lessor typically prices that lease several percentage points below a similar lease without warrants. The number of warrants in the start-proffers is calculated by dividing a portion of the leased line arrived - usually 3% to 15%the line - from the warrant exercise price. The exercise price is usually the stock price of the most recently completed equity round. Including a warrant option often encourages venture owner of any business with companies that are very early in development, or enter where the equipment is rented, is of dubious quality or re-marketability.
Building a young company in an industry leader is in many ways similar to building a state-of-the art airplane or bridge. You need the rightCustomers, partners, ideas, materials and tools. Venture leasing is a useful tool for the savvy entrepreneur. If properly used can this financing tool to help early stage companies accelerate growth, press the most of their venture capital and increase enterprise value between equity rounds. Why is not obtained ownership of actually doing the heavy lifting?
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