Venture,Vulture,Capitalists,Ve finance, share, loan Venture vs Vulture Capitalists
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Venture vs. Vulture CapitalistsBy William CatePublished July 1999[http://home.earthlink.net/~beowulfinvestments/] [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]In the last issue of EFS (V3#10), my Venture Capital articlereflected the current experiences of three small Silicon Valley companies.My article generated comments from four Venture Capitalists. In essence,there are Venture Capitalists and there are Vulture Capitalists.Venture Capitalists fund one company in every 2,500 companies thatquery them. Their preferred exit strategy is the private sale of thecompany. They are willing to hold their equity in an investment for years.They believe that they bring management and financial skills to the companythat will enhance the company's probability of success. If two-of-seveninvestments (29%) succeed, they make money.Vulture Capitalists fund one company in every 100 companies thatquery them. Their preferred exit strategy is to take the company public.They intend to recover their risk capital quickly. They bring sales skillsto the company. Their goal is to make money on every investment.I've come across Vulture Capitalists offering toxic convertibles.They act as Merchant Bankers offering bridge financing. They offersecondary Private Placement financing to high flying, usually Hi-Techpublic companies.The Merchant Banking loans require the repayment of the loan andinterest from the underwriting. The Merchant Banker demands a large bloc offree stock for making the loan. The Merchant Banker dumps the stock quicklyinto the Market. About two years ago, the SEC moved to stop this practice.Any outside party considering doing Bridge Loan financing for a bloc ofstock is asking for trouble from the SEC. Without the stock incentive, thebridge loan is too risky. After all, only half the IPO's are underwritten.Unless you are the underwriter, you can't be certain that the underwritingwill happen.A Convertible Debenture (CD) is a loan that can be converted intoshares of the public company. If the lender loans the public company amillion dollars at Prime plus 3, they will make a profit. A CD loan allowsthe lender to convert the loan into shares of the company. If the CD allowsthe loan to be converted at $4/share and the company's share price goes to$10, the lender makes more money on the stock sale than from theconventional loan. Convertible Debentures are popular in Canada because the stock issued is free trading. They haven't been popular in the States,because the lender gets restricted (144) stock.Toxic Convertibles are Convertible Debentures with an unspecifiedexercise price for the shares. The lender can convert the stock at thecurrent trading price of the shares. This allows the lender to sell shortthe stock against the CD while recovering the loan and interest. The shortsale of stock depresses the company's share price. The lower share priceallows the lender to sell short more stock. It's a downward cycle for thepublic company's stock. The CD is used as insurance against an upward surgein the company's share price. The Toxic Convertible lender can't lose.If a public company does a toxic convertible, by the time theyrepay the loan, their stock is trading for pennies a share. The publiccompany fails and the lender makes a multiple of the principal of theirloan.The moral of this story is that public companies should be wary ofVulture Capitalists. Read and understand every word of every Agreement,before you sign it.To contact the author: Visit the Beowulf Investments website: [http://home.earthlink.net/~beowulfinvestments/] Or, visit the Global Village Investment Club Website:[http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/] Article Tags: Company's Share Price, Vulture Capitalists, Public Company, Company's Share, Share Price
Venture,Vulture,Capitalists,Ve